The recent market downturn has amplified concerns around various crypto assets, with stETH becoming a focal point of anxiety. Much of the fear stems from misunderstandings about what stETH is and how it functions. This article clarifies eight key points to help reduce unnecessary panic caused by misinformation.
stETH Is Not the Next UST
stETH represents ETH that is staked on the Ethereum Beacon Chain. It is fully backed 1:1 by ETH held on the Beacon Chain—meaning 1 stETH always equals 1 staked ETH. Once the Ethereum merge is complete and withdrawals from the Beacon Chain are enabled, users will be able to redeem 1 stETH for 1 ETH. Therefore, comparing stETH to undercollateralized stablecoins like UST is incorrect and misleading.
stETH Is Not Like GBTC
stETH is an ERC20 token with significant utility across the growing DeFi ecosystem. It offers a native yield, meaning holders earn staking rewards that aren’t available to those simply holding ETH. Many market participants are willing to take on arbitrage risks to benefit from this yield.
stETH Is Not Pegged to ETH
stETH does not maintain a fixed peg to ETH. Regardless of its secondary market valuation, the underlying ETH remains staked. The ability to trade stETH for ETH on secondary markets is a matter of convenience, but the market price reflects investor sentiment and liquidity conditions at any given time.
Arbitrage Opportunities Exist
In general, stETH shouldn’t trade above 1 ETH as long as staking deposits remain open. Here’s why:
If 1 stETH trades at 1.05 ETH, a user can stake 1 ETH via Lido to receive 1 stETH, sell it on the secondary market for 1.05 ETH, and earn a risk-free profit of 0.05 ETH. This arbitrage activity would push the price of stETH back down.
Once redemptions are enabled, another arbitrage mechanism will take effect:
If stETH trades at 0.95 ETH, a user can buy 1 stETH at that price, redeem it for 1 ETH after withdrawals are enabled, and earn a profit of 0.05 ETH. This would help push the stETH price back toward 1 ETH.
Withdrawals Won’t Be Immediate After the Merge
It’s important to note that even after the Ethereum merge is completed, users will need to wait for a state transition fork—a process that may take 6 to 12 months—before stETH can be redeemed for ETH. Once withdrawals are enabled, the Beacon Chain will implement a queue system, limiting how many ETH can be unstaked at once.
Four Factors Influencing stETH’s Price
Several factors can cause stETH to trade above or below its collateral value, including:
- Market sentiment and liquidity conditions
- Perceived risk associated with staking providers
- Broader crypto market volatility
- Expectations around the timing of Ethereum upgrades and withdrawal availability
What Could Trigger stETH Liquidation?
Leverage and liquidation risks are major contributors to the current panic. Since stETH is an ERC20 token, it can be used as collateral in DeFi protocols. Some users deposit stETH into lending platforms like Aave, borrow ETH, stake that ETH to receive more stETH, and repeat the process.
If stETH is sold heavily on secondary markets, these leveraged positions could face liquidation, potentially creating a cascade of further selling. While many larger market makers have reduced their exposure, some risk remains.
Entities like Celsius, which hold significant amounts of stETH as collateral for stablecoin loans, could also contribute to selling pressure if they face liquidity issues. It’s worth remembering, however, that regardless of secondary market pricing, each stETH remains backed 1:1 by ETH on the Beacon Chain.
For those with longer time horizons and higher risk tolerance, buying stETH at a discount could boost overall returns. For example, if stETH trades at a 30% discount (0.70 ETH per stETH) and the staking yield is 4% APR, an investor could achieve an effective APR of around 38% over a two-year period—assuming the merge is successful and redemptions are enabled within that time.
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A Discount of 3–5% May Be Normal
Is the potential yield worth the risks associated with smart contract vulnerabilities or liquidity challenges? Not for everyone—but certain arbitrageurs will likely take the chance. While liquidation cascades can be painful, and stETH may temporarily trade below its backing value, this does not imply a death spiral.
Once the current panic subsides, stETH will likely continue to trade at a discount—perhaps around 3–5%—depending largely on market sentiment. Regardless, the Beacon Chain will continue operating, DeFi will continue evolving, and staking services like Lido will remain active.
Frequently Asked Questions
What is stETH?
stETH is a liquid staking token that represents ETH staked via the Lido protocol. Each stETH is backed 1:1 by ETH held on the Ethereum Beacon Chain, and it accrues staking rewards over time.
Can stETH lose its peg permanently?
No. Since stETH is fully backed by staked ETH, it is not designed to maintain a market peg but rather to track the value of staked ETH over time. Once withdrawals are enabled, arbitrage will help align its market price with its underlying value.
How do I earn yield with stETH?
Simply holding stETH in a non-custodial wallet allows you to earn staking rewards, which are automatically rebased into your token balance. You can also use stETH across DeFi platforms to participate in lending, liquidity provision, or other yield-generating strategies.
What are the risks of holding stETH?
Primary risks include smart contract vulnerabilities, liquidity fluctuations on secondary markets, and delays in Ethereum’s upgrade timeline. There is also the potential for temporary depegging during periods of market stress.
When can I redeem stETH for ETH?
Withdrawals are expected to become available 6–12 months after the Ethereum merge occurs. The exact timeline depends on the successful implementation of a state transition fork and the subsequent activation of withdrawal capabilities.
Is stETH a good investment during a bear market?
For long-term believers in Ethereum, acquiring stETH at a discount could enhance overall returns through combined staking yield and potential price appreciation. However, it’s important to assess personal risk tolerance and market conditions before investing.