This article explores the reasons why Lido's stETH may have a high premium
According to data from Okey Cloud Chain masters, as of 10:30 today, the Ethereum 2.0 deposit contract address has received 7.7675 million ETH, accounting for 6.63% of the current supply of Ethereum. A large amount of pledged ETH has also spawned a huge market of liquid staking (Liquid Staking). The so-called liquid staking means that the user pledges ETH to the agreement, and the agreement pledges on behalf of the user, and then mints ETH claiming tokens for the user 1:1, and attributes the staking rewards to these liquid staking tokens. stETH launched by LidoDAO is a typical representative.
In the past cognition, people have suggested that the market transaction price of ETH pledged derivatives will have a certain discount relative to ETH. After all, xxETH is not real ETH. Considering the risks of redeeming ETH (such as the failure of the project party to pay, etc.), this statement is reasonable. However, Elias Simos, a well-known data expert and Coinbase protocol expert, believes that liquid collateral tokens (especially stETH) will generate a significant premium after the merger.
After investors deposit ETH into Lido DAO, Lido will mint stETH for investors 1:1, and distribute the collected ETH deposits to validator operators, allowing ETH to participate in pledge and get rewards. The stETH adopts the aToken standard, which is an interest-bearing token that will be minted when the principal is deposited and destroyed when redeemed. As the pledged ETH continues to be rewarded, the total amount of ETH held by Lido DAO is constantly increasing, and the balance of stETH in circulation will also increase accordingly. stETH also generates "interest" in real time, and investors can see the balance growing every minute.
At present, stETH leads the ETH mortgage derivatives market with a share of 85%. There are many reasons for this, such as high-quality teams, strong communities, and excellent execution. Elias Simos is particularly concerned with user experience.
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What does this have to do with user experience?
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Second, such deep liquidity means that even large whales can trade large amounts with very little slippage, buying or selling at any time. In contrast, under normal circumstances, if we want to withdraw the pledged ETH, we have to wait until after the merger, and all pledged ETH cannot be retrieved at this stage. Even after the merger, it will take a few days for us to take out the pledge.
Why do you say that the price of stETH will rise after the merger? What does this have to do with merging?
When the merger happens, the opportunity cost of *not staking* will increase substantially. Network transaction fees and MEV will nearly double the annualized income of staking (the beneficiaries of transaction fees and MEV under PoS are all validators participating in staking). Moreover, the withdrawal time (it takes a few days to withdraw the pledged ETH) will also be clear. This drives demand for ETH staking.
65% of the tokens in the 5 largest PoS networks are currently staked. Assuming the same is true for the merged ETH, this means over 70 million ETH will be staked, compared to the current total of 7.76 million ETH staked.
There are many ways for investors to participate in ETH pledge, including stETH. There is a catch here, though: the beacon chain has an activation queue, which means that only a certain amount of staking demand can be satisfied at any given point in time. To be more precise, currently only about 4 validators can join the beacon chain per epoch. Based on this calculation, only about 10 million ETH can be allowed to enter the validator every year. Even if we only have a pledge demand of 20 million ETH in the first year, in the end there will be 2 demands corresponding to 1 supply, which is obviously in short supply.
How can excess demand be met? Elias Simos speculates that some of this demand will flow into liquid collateralized derivatives. Given stETH's strengths, it will naturally absorb a fair amount of demand.
Assuming that stETH only absorbs 10% of the excess demand, it is equivalent to 1 million ETH flowing into Lido by buying stETH. Currently, the supply of stETH is about 1.3 million.
As it stands, the extra buyer demand and upward pressure on stETH will soon disappear due to arbitrageurs. Once the price of stETH rises, the existence of arbitrage space will allow investors to deposit ETH into Lido, obtain the corresponding stETH, and then sell it to the market to earn a premium, and so on until the premium disappears.
But there is a problem. Given the excessive demand for staking and long activation queue times, the marginal ETH deposited into Lido dilutes the returns of the trading pool, as new ETH enters the pool much faster than it can be deployed to validators. Given the circumstances described above, it is easy to imagine that Lido will implement a process that does not attract new depositors at the expense of existing depositors. Then, without arbitrage, the stETH/ETH price will generate a significant premium.
If this is the case, then the following questions come to the fore:
This article is from The Way of Defi, reproduced with authorization.
This article is from The Way of Defi, reproduced with authorization.
