Impact of stETH Price Action
Lido Finance (stETH):
Lido Finance offers investors a liquid alternative to staking their ETH (stETH) that is fully backed and can be redeemed 1:1 post-merge. However, stETH is still relatively illiquid, with the stETH/WETH Uniswap pool having $5M and the stETH/ETH Curve pool having $1.2B in liquidity respectively. The main issue with the Curve pool is that it is skewed disproportionately towards stETH with a ratio of 0.76:0.24, causing stETH to trade below par. The bigger this skew becomes, the lower stETH will trade below par, and the riskier a stETH investment becomes with increased volatility and a heavier reliance on ETH 2.0/Lido success to receive a positive ROI. Subsequently, we have seen stETH go from trading at 1 ETH on May 12th, to its current price of 0.96 ETH as investors look to de-risk their bet on a successful merge.
Celsius’ Liquidity Issues:
Despite losing millions of customers’ funds through protocol exploits, Celsius currently has approximately 1,000,000 ETH under management. However, amidst the chaotic market conditions, customers are withdrawing funds at an average rate of 50,000 ETH per week. Why would this be an issue you might ask? Well, only 27% of those funds are actually in liquid ETH, meaning that unless alternative actions are taken, Celsius will not be able to honour their customers’ withdrawals within 5 weeks. So what are their options?
- Celsius sells most of their stETH for a considerable loss.
- Celsius increases its $1B+ debt on Aave which is being borrowed against its stETH position.
Now option 1 would result in stETH depegging by up to 50%, causing Celsius to suffer a massive loss and indirectly liquidating many positions that are using the the $2.5B worth of stETH colateral on Aave. Additionally, given the amount of liquidity currently available, Celsius wouldn’t be able to even sell off their entire position, thus exacerbating their short-term unrealised loss. Morevoer, as they use stETH as colateral on Aave, they would also need to reduce their debt or add alternative funds to maintain a healthy LTV ratio.
However, there is also the chance that this option may become unfeasible as large holders continue to offload their stETH at a discount. If holders such as SwissBorg (which has $27M in the Curve pool and holds 52,000 stETH) pull their liquidity and sell their positions beforehand, then Celsius no longer has enough exit liquidity to raise funds for withdrawals (even at an unphathomable loss). Furthermore, the possibility of these large holders selling their positions would also ruin the second option as Celsius’ LTV ratio would become increasingly unhealthier given its 450,000 stETH colateral position. If market conditions worsen and Celsius are unable to act swiftly, they could very well end up being liquidated as the price of stETH plummets.
Concern for Aave Stakers:
With stETH-colateralised loans being liquidated on Aave becoming a genuine possibility, the chance of a shortfall event occurring increases as well. As part of Aave’s ‘Safety Module’, 30% of Aave tokens locked in the staking contract will be used to cover liquidity providers’ loss of capital (i.e. a shortfall event). With Celsius -alongside an array of arbitraging speculators- using stETH as colateral, if the price continues to fall further below par and their positions get liquidated, where will the liquidity come from to actually execute the liquidation? The safety module will have to come into play and Aave stakers will be forced to cover the deficit. With the potential of a shortfall event occurring, could we see many Aave stakers activating the 10 day ‘cooldown period’… or do we even see stakers selling their positions OTC for a discount <30% to speculators betting on the occurrence of a shortfall event?
