Original compilation: Amber
Original compilation: Amber
In a bull market, things like hacking, rug pull, and unanchoring are never taken seriously. People generally just treat these things as after-dinner conversations. After all, "printing money" is the absolute theme of the bull market.
But in a bear market, any "disrespectful" behavior will be given more doomsday colors. All kinds of panic speech spread rapidly through Twitter and other channels, and will further impact the already precarious currency price.
But the bad phases of the market are not for nothing, and such phases actually provide the industry with valuable experience in being able to separate the wheat from the chaff. Bear markets are very precious to real builders, because only at this stage will the overall rhythm of the market slow down.
The recent crash of Terra taught us the importance of sustainability when designing mechanics. The cases of Celsius and stETH, which were rapidly fermented with the market crash this week, made us realize the importance of transparency when designing mechanisms.
In fact, this once again proves why DeFi is "better" than CeFi.
A brief review of the stETH event
Lido is a liquid staking protocol, based on which users pledge ETH to Ethereum 2.0 and receive stETH in return. stETH is a liquid staking derivative (LSD) that accumulates staking rewards through rebases and represents the exchange right to the underlying ETH held by the protocol. These ETHs are routed to various validators for staking on the Beacon chain.
Lido provides a valuable service that removes the opportunity cost of staking, enabling ETH holders to accumulate staking rewards while retaining the liquidity of the asset itself, allowing it to continue to leverage this part of the asset to generate interest within DeFi .
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ETH stored on Lido, source: Nansen
The withdrawal function of Beacon Chain will only be enabled after the merger. At that time, each stETH can be exchanged for the total amount of ETH deposited in Lido in proportion. Prior to this, the only way stETH holders could exit their positions was by selling through the DEX’s secondary market.
Currently stETH lacks a redemption mechanism or liquidity, but this is no problem for holders who believe that the merger will be successful. But this obviously creates a lot of trouble for entities looking to exit large-scale positions early.
stETH's so-called "unanchoring" problem
The largest source of liquidity for stETH is the stETH-ETH pool on Curve. The stated goal of this pool is to maintain a 50/50 balance between the two assets. However, as of the time of writing, its ratio is 21.7% ETH to 78.2% stETH.
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ETH/stETH pool weight change curve, source: Parsec
This imbalance is caused by "big players" like Alameda Research exiting positions. This has caused the price of stETH/ETH to fall from 1 to approximately 0.935 over the past five weeks.
In this uncertain stage of the market, certain market participants are prioritizing ensuring the liquidity of their holdings.
It is worth noting that stETH does not necessarily have to trade at parity with ETH. The price of LSD has no effect on the operation of Lido nor the incorporation of Ethereum 2.0. In fact, this discount is to be expected during a bear market, where liquidity is at a premium.
However, this decline does pose a significant risk to protocols using stETH as collateral, as well as holders.
Exposure to stETH in DeFi
The risk of stETH as collateral in DeFi is mainly concentrated in two protocols: Aave and Maker.
compared to only4.9% of the total supply of stETHAave is at far greater risk than being locked in Maker vaults, the protocol holdsMore than 1.46 million stETH, worth about $1.85 billion, accounting for about 34.6% of the total LSD supply.
Many DeFi users have been using Aave to capture the inherent "excess" pledge income of stETH, the strategy is as follows:
Deposit stETH as collateral;
lend ETH;
Swap ETH for more stETH;
Re-deposit stETH and repeat the process.
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stETH liquidation price, source: Parsec
It is true that this cycle is profitable, especially when the stETH/ETH ratio is close to 1, this kind of operation seems to have almost no risk, but as this ratio drops, these "players" are on the verge of being liquidated , and this has become what is happening.
If the stETH/ETH price reaches 0.75, approximately $236 million in stETH will be liquidated. This figure is about the same as Aave's single-day trading volume. While Aave does not expect to incur bad debts if stETH/ETH falls further, and the protocol is considering taking precautionary measures to reduce risk, potential liquidations could cause the price of stETH to drop even more.
However, the biggest loss caused by the decline in the stETH/ETH ratio will not be within DeFi, but in CeFi.
Celsius crisis
The CeFi lending platform Celsius has fallen into a crisis caused by the loose price of stETH. The lender will have $28.6 billion in assets under management in 2021, and official disclosures show it currently has 1.7 million users andHolding 151,534 BTC。
Celsius is centrally managed, its loan book is opaque, and neither users nor speculators have a way to assess the health of the platform. And Celsius bet a large amount of assets in the stETH system, which made its positions very fragile. With the liquidation of stETH underway, Celsius had to find a way to liquidate these holdings in order to satisfy customers' withdrawal requests. Given that on-chain liquidity is drying up, the price of stETH is dropping. Redeeming assets with locked ETH is not a viable option. Meanwhile, Celsius’s own token, CEL, has plummeted 64% in the past week.
As the largest holder of interest-bearing stETH (StETH on Aave). On June 12, Celsius suspended withdrawals, swaps, and transfers on the platform. This comes after some users accused the company of putting accounts in forced "HODL mode," temporarily limiting withdrawals from user accounts with a so-called security feature. There is no timetable yet for when things will change.
Stopping withdrawals from the platform is an ominous sign. The uncertainty is further fueled by Celsius' recent actions and the opacity of its CeFi infrastructure. Celsius stopped withdrawals during the run, significantly damaging its trust with existing and potential future users.
It's unclear if this poses a risk to the solvency of the platform, but it doesn't look promising. In the past 7 days, the CEL token has dropped from $0.76 to $0.15. If Celsius requires depositors to "admit compensation" or even declare "bankruptcy", this will be the most severe accusation against CeFi. The bad experience of Celsius may cause contagion among the CeFi institutions related to it.
Further thinking, why do you say DeFi>CeFi?
The Celsius fiasco bloodily reaffirmed the value of DeFi, especially the meaning of "high transparency". Through DeFi, we can monitor the risk and solvency of the platform in real time 24/7/365. We can see exactly how much Aave is exposed to stetH, at what price these positions will be liquidated, and how much liquidity is available to service them. Thus, users can more easily make informed decisions.
For Celsius and other CeFi platforms, we have no means of judgment and can only be forced to trust volatile centralized entities. This "mechanism" obviously has huge loopholes. A bear market can further amplify this vulnerability.
At the end of the day, this will be a case study in the development of the cryptocurrency industry, we must learn to throw the garbage out in time. Vulnerabilities, weak infrastructure, and centralized single points of failure will be exploited by market forces. Maybe we'll go through short term labor pains, but ultimately be healthy in the long run.
Within the Ethereum ecosystem, everything is connected, so this could lead to wild volatility in ETH in the short term. If LSD continues to “hurt” ETH, it could present a huge opportunity for savvy investors when withdrawals on the Beacon chain are enabled.
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