Original title: Does stETH have a liquidity issue? Lido says no but not everyone』s convinced
Original author: Tim Craig, DLNews
Original compilation: Luccy, BlockBeats
Editors note: On January 12, according to monitoring by on-chain analyst ai_ 9684 xtpa, Celsius once again released the pledge of 14,000 ETH, and subsequently deposited it into Coinbase and FalconX. In addition, in response to Celsius recent large-scale transfer of ETH, encryption researcher @0x BoboShanti studied Celsius wallet data and pointed out that there has been a gap in Celsius ETH.
Related Reading:Digging deeper into the data behind Celsius: it holds over 500,000 ETH and has multiple internal violations.》
On the other hand, DL News DeFi reporter Tim Craig believes that this behavior may lead to a decline in stETH liquidity from the perspective of pledge withdrawal blocking, which will lead to large-scale liquidation for users who use stETH to borrow. BlockBeats compiles the original text as follows:
At the beginning of the year, defunct crypto lending platform Celsius announced that it would withdraw $1.6 billion worth of Ethereum it had previously staked on the chain.
This move immediately caused a blockage in Ethereum’s pledge withdrawal queue, making it impossible for other Ethereum stakers to perform withdrawals.
For most stakers, waiting a few days to withdraw their Ethereum is probably just a minor annoyance.
But according to some analysts, such delays could pose major problems for Lido and stETH, the largest liquid Ethereum-staking token with a circulating value of more than $23 billion.
“The decline in stETH liquidity is a serious issue,” Riyad Carey, an analyst at crypto research firm Kaiko, told DL News.
The fear is that stETH could become decoupled from Ethereum again due to low liquidity levels and congested exit queues, which would lead to massive liquidations as people leveraging the token on lending protocols.
Although depeg did not occur this time, many are worried that if the crypto market suddenly drops again, the ether staking queue may quickly lengthen as investors rush to unstake their ether and cash out.
Lido maintains that stETH has sufficient liquidity and has mechanisms in place to prevent another depeg from happening.
But as stETH becomes increasingly connected to the broader DeFi ecosystem, the threat posed by a potential liquidity crisis will only become more apparent.
illiquidity
According to data from Lido’s stETH Liquidity Dune Dashboard, there is currently approximately $274 million in liquidity on decentralized exchanges.
Marin Tvrdić, Lido’s head of protocol, said in a recent X article that stETH liquidity on centralized crypto exchanges is in the seven to eight-figure range.
But Carey believes that the current liquidity of stETH is insufficient.
He said that there are more than $3 billion in stETH leveraged bets on the DeFi lending protocol Aave, and with the Ethereum validator exit queue crowded, if these positions suddenly need to be unwound, there will not be enough liquidity to support it.
Lido is unable to immediately convert stETH to Ethereum due to the validator queue being clogged. This means that even trading pools that swap between stETH and Ethereum will need to make up the shortfall.
If stETH starts to diverge from its peg amid demand imbalances, it could trigger a series of liquidations on Aave. “If any large stETH holders get impatient and sell, things could get ugly,” Carey said.
And Carey isnt the only one worried.
Ariah Klages-Mundt, co-founder of the stablecoin protocol Gyroscope, said that stETH may have a high probability of depeg in the future.
Dont be too surprised if it happens at some point. In finance, you have to plan for things like this, Klages-Mundt said in a recent X article. While not all Ethereum researchers explicitly pointed to Lido’s stETH, several influencers shared similar sentiments.
Leveraging stETH on lending markets, such as Aave, is a popular strategy for increasing DeFi returns. Investors deposit stETH into Aave and borrow Ethereum, then deposit it into Lido to receive more stETH.
Repeating this cycle compounds staking returns on stETH, but also carries the risk that investors could be liquidated if their stETH collateral declines in value relative to the borrowed Ethereum.
excellent record
However, not everyone thinks Lidos current liquidity levels are a problem.
Adcv, an anonymous contributor to Lido DAO, told DL News that it is “inaccurate” to say that Lido’s current stETH liquidity is insufficient based on “substantial on-chain evidence.”
“stETH has institutional-level liquidity on the main network on major on-chain and off-chain trading venues, second-tier AMMs, and major CEXs,” Adcv said.
To back up his claims, Adcv pointed to Lido’s excellent track record of fulfilling stETH redemptions.
He said that of the 3 million Ethereum withdrawn from Lido since the Shapella upgrade launched withdrawals last year, fewer than 30,000 transactions took more than 120 hours to process.
Aave, on the other hand, relies on the judgment of DAO service providers such as Chaos Labs and Gauntlet to assess the risks of allowing its users to utilize stETH.
In November last year, Chaos Labs proposed that Aave could increase the supply cap of stETH deposits by an additional 1.1 million tokens without introducing significant risk to the protocol.
But this suggestion is also backed by Gauntlet, and comes with a proviso: Chaos Lab’s risk calculations assume no major price divergence between Ethereum and stETH.
Precaution
According to Carey, Lido’s liquidity issues began when it stopped rewarding LDO tokens for providing liquidity in Curve Finance’s stETH-ETH pool.
Lido stopped incentivizing liquidity due to Ethereums April Shapella upgrade, which allowed stakers to start withdrawing their Ethereum from the blockchains staking contract.
This means that, rather than relying solely on stETH liquidity on exchanges, Lido can now redeem stETH via Ethereum in the event of a supply imbalance.
Lido’s own data shows that stETH liquidity on Curve Finance has dropped from approximately $800 million to $274 million since the Shapella upgrade.
According to Carey, Lido could do more to enhance liquidity.
“I wrote in July that I thought Lido should consider partnering with market makers to help increase off-chain liquidity,” he said. Although off-chain liquidity has improved since then, I still think this is still worth exploring.
It seems Lido is looking for ways to further ensure stETH liquidity.
In August, crypto analytics platform Glass Markets posted a proposal on the Lido Research Forum, requesting grants to assess stETH’s liquidity and write a research report detailing the best way to handle its recommendations.
A member of the Lido DAO operational workflow confirmed in a post published in December that Glass Markets had received funding to conduct a research report.
DL News contacted Glass Markets and Lido to inquire about the status of the research report but did not immediately receive a response.
