How serious is the risk of stETH when institutions withdraw from Lido?

stETH unpegged and its value fell to 0.95 ETH.

How serious is the risk of stETH when institutions withdraw from Lido?

Liquidity is drying up, Smart Money is pulling funds, coupled with rumors that lending platform Celsius is on the verge of bankruptcy, all this could trigger a massive sell-off in stETH, Messari analyst @Riley_gmi and I have been working on this recently, here are ours Some discoveries.

First of all, what is Lido & stETH?

Lido provides users with ETH liquidity staking services, users can lock any amount of ETH, and then receive the equity Token stETH to earn income in DeFi.

After the merger, each stETH can be exchanged for 1 ETH normally.

Each stETH can only be redeemed through the listing of the beacon chain. Until then, the 12.8 million ETH in the ETH 2.0 staking contract was illiquid.

Lido holds 32% of the 12.8 million ETH (about 4.1 million)

How serious is the risk of stETH when institutions withdraw from Lido?

Before we dive into Celsius’ balance sheet and track Smart Money addresses, let’s take a look at how stETH should be priced:

As Lido said, stETH is pegged to ETH (on the beacon chain), and the market is now starting to reprice the fair price of stETH.

But given the liquidity dynamics of this investment, how much is a fair discount on the price of stETH?

stETH pricing should be determined by a combination of the following 4 things

· Current market desire for liquidity (demand/supply)

· Current market volume and liquidity (how the market responds to selling pressure)

· Likelihood of successful/delayed merger

· Smart contract risk

describe in detail

1. Desire for market liquidity

Demand for liquidity ebbs and flows at different stages of the market cycle. When prices are rising and liquidity is high, closing positions is easy and costs are low, and vice versa.

Through on-chain data, we’ve seen massive withdrawals of stETH, such as crypto financial services provider Amber, whose wallet addresses have withdrawn over $140 million worth of stETH from the Curve pool.

This is a growing trend over the past few days, which may indicate that a larger potential sell-off is brewing.

How serious is the risk of stETH when institutions withdraw from Lido?

In this case, the most critical supply and demand side will look to the crypto lending platform Celsius. If one believes that Celsius may be forced to sell a large amount of stETH, then this will greatly change the supply and demand relationship we have emphasized earlier.

The key question is how much can the market absorb and at what cost?

So how is the liquidity of stETH?

2. Current market volume and liquidity

In the early hours of this morning, total liquidity in the pool dropped by over 20%, there was a massive sell-off in wallets associated with Alameda Research, and Celsius also mentioned this before I posted this.

Amber’s withdrawal of more than $150 million in stETH liquidity is significant and likely just an early warning of a sell-off.

That’s $150 million, and it’s likely to hit the market in the next few days.

The second point is that the liquidity pools on Curve become extremely unbalanced. Such unbalanced capital pools are dangerous and greatly increase the risk of decoupling.

Extracting liquidity from 3pool on Curve was the first shot that led to the collapse of UST. Less liquidity = more risk.

The point is, given the closed liquidity structure of stETH, many institutions and ordinary players are being exposed to risk.

Those stETH entering the market could deal a major blow to the market.

3. Likelihood of a successful/delayed merger

The penultimate risk is the possibility of a beacon chain delay or even failure, which will have an impact on stETH. As pointed out by some KOLs, stETH is similar to ETH futures.

In this sense, if the merger is delayed and it takes 6-12 months after the merger to get ETH back, then locking up tokens will increase liquidity costs that are far greater than the benefits gained during this period.

4. Smart Contract Risks

Demand/liquidity/merger risks aside, there is also smart contract risk.

Pricing is straightforward based on the cost of insurance for the Lido deposit contract on Nexusmutual (2.6%).

Therefore, the smart contract risk ALONE (minimum risk) in stETH is at least 2.6%, which is roughly the current discount of stETH/ETH.

How serious is the risk of stETH when institutions withdraw from Lido?

This shows that the risk of stETH is seriously underestimated.

A similar case to how stETH is priced is GBTC, as they are both closed-ended.

If you want to sell your GBTC position, you have to sell it on the secondary market as it is a closed-end fund. Until it is converted into an ETF, the secondary market is the only option for liquidity.

If you want to sell your stETH, you have to sell it on the secondary market until the merger.

In both cases, this liquidity, open-ended risk, and supply and demand dynamics are the underlying factors that affect the fair value of the asset’s market.

But in this case, why one is trading at a 3% discount and the other is trading at a 30% discount, not to mention the factor of stETH and Lido’s smart contract risk.

Lido’s 7 investors have created a similar situation to UST, they are a16z, Alameda Research, Coinbase, Paradigm, DCG, Jump Captial and Three Arrows Capital.

Similarly, Blockfi, one of the largest holders of GBTC, currently has a floating loss of more than 500 million US dollars.

How serious is the risk of stETH when institutions withdraw from Lido?

This has been reflected in the valuation of Blockfi, which is raising a new round of financing at a valuation of $1 billion, and their valuation in March 2021 is $3 billion.

What’s the point? Many big players in the game tend to be wrong, and in this case they completely misestimate the liquidity cost of GBTC and stETH, both of which are liquidity black holes in this case.

So ultimately, we believe that the one-year staking yield for this liquidity trap is too low.

Maybe the number should be similar to GBTC at 30%, but not 3%.

Now, let’s see what’s going on in the market right now:

Liquidity is exhausted and whales and smart money are selling.

The amount of stETH held by smart money addresses dropped from 160,000 stETH to 27,800 stETH in 1 month.

How serious is the risk of stETH when institutions withdraw from Lido?

In fact, Alameda dumped 50,615 stETH into the market in 2 hours this Wednesday.

How serious is the risk of stETH when institutions withdraw from Lido?

It is very possible that someone deliberately pulled the peg towards the liquidation price of stETH.

Leveraged stETH holders risk being liquidated if they do not have sufficient collateral.

For example, at stETH=0.8 ETH, $299 million will be liquidated.

How serious is the risk of stETH when institutions withdraw from Lido?

The emphasis here is on the short term. I ultimately believe people will be happy to buy stETH at a discount. However, the situation changed slightly when some institutions had to sell.

The institution that may have to sell is Celsius.

By performing on-chain analysis, I was able to calculate Celsius’ assets and liabilities.

Total assets are $3.48 billion, loans are $1.11 billion, and net assets are $2.374 billion (assuming Celsius holds 45% of its CEL Token supply, worth about $100 million).

The full breakdown of the holdings is as follows:

*Note, this is just their asset in DeFi, no one knows what crypto assets they hold elsewhere (eg in CEX).

They claim to have about $10 billion in TVL, but that’s all I can find.

How serious is the risk of stETH when institutions withdraw from Lido?

How serious is the risk of stETH when institutions withdraw from Lido?

The important part here is that Celsius is the whale holder of stETH. In fact, they are the largest interest-bearing stETH holders (on AAVE).

How serious is the risk of stETH when institutions withdraw from Lido?

If we specifically analyze Celsius’ ETH holdings, we find that 71% are held in illiquid or low-liquidity types.

$510 million in ETH is locked in the ETH2.0 staking contract and cannot be taken out until after the merger.

$702 million is in stETH and cannot be easily withdrawn through liquidity pools.

How serious is the risk of stETH when institutions withdraw from Lido?

What if Celsius users want to redeem their money?

Are they redeeming?

Why did they activate “HODL Mode” on their account?

On October 8, 2021, Celsius reported that its AUM was over $25 billion. Celsius is a private company that has only released its financials for 2019 and 20, and despite repeated calls from investors on various social platforms to release new financials, in 22 they did not.

The company also did not issue an audit report. They made it in ’19 and ’20, but not in ’21.

On 12/20/21, they partnered with Chainanalysis to release a report that confirmed a record of users depositing over $7.609 billion on the platform and withdrawing over $4.29 billion since its 18-year launch.

According to the report, Celsius had on-chain assets worth $3.31 billion on Dec. 20.

The company reported administrative expenses of $35 million, 40% higher than cost of sales.

The lack of transparency has investors worried about the possibility of a run on Celsius.

How serious is the risk of stETH when institutions withdraw from Lido?

Instead of holding positions in ETH, BTC, and LINK, the company currently holds debt in stablecoins, which exposes them to market risk of downside cryptocurrency prices.

If the market crashes, they will face a debt crisis.

After Terra crashed (May 6-12), there was an outflow of $750 million (150 million ETH and $150 million BTC).

The company had a net outflow of $450 million in the last two weeks of May.

Celsius experienced a total of $1.2 billion in outflows, even if we ignore the week when outflows were not reported.

Such outflows increase the risk of a run on Celsius.

The chart below shows the outflow of funds over the past 5 weeks. Total withdrawals over the past 5 weeks are 190k ETH.

Compared to the previous 5 weeks, Celsius had 50k inflows.

How serious is the risk of stETH when institutions withdraw from Lido?

How serious is the risk of stETH when institutions withdraw from Lido?

Celsius’ ETH and general assets have been experiencing massive withdrawals.

Currently, they have enabled “HODL Mode” which prevents users from withdrawing funds from Celsius.

Another problem with Celsius is that only 29% of Celsius’ ETH is liquid:

How serious is the risk of stETH when institutions withdraw from Lido?

1. Liquid ETH

Most ETH is deposited in AAVE (150k ETH) and COMP (45k), both positions are backed by about 45% of the assets in LTV.

They must pay off the loan before they can withdraw their ETH.

2. 458k ETH in StETH

The liquidity pool on Curve, st-ETH and ETH are highly unbalanced, with only 250k ETH against 642k stETH. If Celsius were to exchange all St ETH, they would only get 250k ETH.

3. 324K ETH has been deposited into the ETH 2.0 contract, Celsius will not be able to obtain these ETH for at least 1-2 years

– 158K of which were obtained through Figment.

– The remaining 166,400 was obtained through the Ethereum Foundation ETH 2.0 contract.

Additionally, they lost $70 million in the Stakehound incident.

(BlockBeats Note: On June 7, according to Dirty Bubble Media, the encrypted lending platform Celsius Network lost at least 35,000 ETH in the event of Stakehound private key loss.)

Then another $50 million was lost in the BadgerDAO theft.

On top of that, $500 million in customer deposits was wiped out in the recent LUNA crash.

So how do you trade to make a profit in this situation?

We have seriously considered and contacted market makers and searched for DeFi. You need to find a place to borrow stETH before you can sell it, and there is no related contract, making it a bit difficult to make money from it.

There are two main ways to do this.

1. OTC market.

If you are a large institutional player, you will have access to market makers and brokers who can lend you stETH against your ETH collateral.

This is impossible for 99% of market participants.

2. Euler finance

You can deposit ETH with a 4% holding cost and borrow wstETH to sell on Curve, Uniswap or 1inch.

The profit-to-loss ratio of the trade is good because the biggest cost is that ETH is back on the peg and you have to repay the loan; this is about a 5-6% loss.

Similar to UST, this is a cheap way to bet on the market given the limited upside risk of stETH versus ETH value exceeding 1:1.

Another way to profit from this trade is to buy stETH at a discount. If stETH trades at a bigger discount than GBTC (30%) and there are forced sellers on the market in degrees Celsius and others. To us, this feels like a great opportunity to convert any ETH holdings into stETH.

Another way to profit from this trade is to buy stETH at a discount. If stETH trades at a bigger discount than GBTC (30%) and there is an institution (like Celsius or others) in the market that must sell. To us, this feels like a great opportunity to convert any ETH holdings to stETH.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/how-serious-is-the-risk-of-steth-when-institutions-withdraw-from-lido/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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