Institutions are withdrawing from the stETH pool, will the run break happen?

Original Author: Small Cap Scientist

Original compilation: 0x711, BlockBeats

This article is compiled from DeFi analyst @SmallCapScience Views on personal social media platforms, BlockBeats organizes and translates them as follows:  

Today’s research topic is stETH/ ETH, its trading pair liquidity is running out.

As we all know, stETH is the pledged version of ETH on Lido, and its purpose is to protect the security of ETH after the merger.

Therefore, there should be a one-to-one relationship between stETH and ETH, and there is a liquidity pool on Curve.  

However, now the liquidity pool on Curve has become extremely unbalanced, and the proportion of stETH is close to 75%, an unprecedented tilt ratio.

This resulted in The conversion ratio of stETH to ETH has become 1.03:1, and the degree of inclination is still increasing.

Theoretically speaking, the rhythm of unanchoring is determined by the slope ratio of the liquidity pool and the A factor.

About factor A, you can refer to Tweet by @Tetranode. Simply put, the stETH pool is currently at a critical level, and unanchoring may accelerate at any time.

stETH and ETH are anchored one to one, and several It will happen within a month. Buying stETH now seems to be an arbitrage operation that can be profitable. This is very different from UST without asset support, so why are investors withdrawing?

I have observed that Alameda Research is withdrawing their position. Within a few hours, regardless of slippage loss, Withdrawal of nearly 50,000 stETH.

As we all know, Alameda has a very good sense of smell in the market...

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In fact, they are one of the seven largest holders of stETH on Lido, and their move is very likely It will cause a run on tide.

Look at other big positions. Get started with lending platform Celsius.

Celsius has nearly 450,000 stETH, worth about $1.5 billion. They deposited these stETH into Aave as collateral, lending about $1.2 billion in assets.

This may not be too big problem, but...

Celsius is rapidly Redemption positions of investors that consume their liquidity.

They take advantage of these billions of dollars of illiquid assets, Obtain bulk loans to pay off clients' redemptions.

Celsius is struggling, past A year in which they lost huge sums of money in hacking incidents, things are getting worse.

At first they were in  $70M lost in Stakehound event. (BlockBeats

Note: On June 7, according to Dirty Bubble Media, the encrypted lending platform Celsius Network lost at least 35,000 ETH.)

Then $50M Lost in BadgerDAO Hack.

In addition, $500 million in customer deposits was wiped out in the recent LUNA debacle. Their reckless handling of client funds is beyond words.

These are only the theft of public information, and it does not rule out other unknown thefts.

Investors are now redeeming their positions at a rate of 50k ETH per week, meaning Celsius has only two options:

1. Swap their stETH to ETH and then to Stablecoin to increase liquidity sex.

2. Mortgage stETH and repay customers with loans.

If they choose the first option, they hold about 450,000 stETH, but there are only 242,000 ETH in Curve's pool . Every sell-off will exacerbate the tilt of the exchange rate of the trading pair, which is a big loss for them.

There is also about $5 million in Uniswap stETH liquidity, in addition, the liquidity of CEX is unknown. But The liquidity on CEX, Uniswap, and Curve should not be enough to support the sale of all positions. If they can, they should go directly to CEX instead of selling on Curve.

The trading pair of stETH is only ETH, (there is USDC trading pair on FTX, but the proportion is very small), which means that the exchange of stETH After becoming ETH, ETH will also face selling pressure.

They have lent a lot of money in stETH, and these multi-billion dollar selling pressure will make their mortgage ratio more dangerous.

Assuming a severe decoupling of stETH or market conditions getting worse.

Celsius can be liquidated. Borrowing becomes more expensive, their collateral loses value due to market conditions, selling below the peg makes them lose even more, and liquidity dries up. Negative feedback loop.

Another thing worth noting is how Aave will liquidate stETH, an illiquid asset.

Are they responsible for these assets, or are they forced to be illiquid for months while risking a drop in the price of ETH? What should they do?

It is very likely that Celsius was frozen for redemption prior to liquidation.

Celsius With only a few weeks of funds remaining and significant losses due to unanchoring, borrowing fees, and the risk of the merger being delayed. It seems to be only a matter of time before being frozen.

Let's not forget that they are not the only giant whales in this case. When other whales smell blood, they will push the envelope, shorting the futures market while liquidating other positions. Oh oh that's probably why Alameda Dump 50,000 stETH and replace it with Stablecoin...

< a href="https://twitter.com/MikeBurgersburg/status/1534485012296368128?s=20&t=XqQNw3U9MHvQaxDt_6rbog" target="_blank">Asset management platforms like SwissBorg hold about 80,000 stETH client assets< /a>. Through its wallet, it can be found that they put $27 million of stETH in the Curve liquidity pool, and there are 51,000 stETH available. If they withdraw from the liquidity pool and dump stETH, Celsius will be in a dilemma.

After the feast, the giant whale is leaving, who will be the first?

Looking at today's deals, there have been some massive exits including This is 2,400 stETH (approximately $4.2 million).

As the liquidity of stETH is getting lower and lower, the author will continue to pay attention Celsius Other positions that need to be liquidated. About 7 million US dollars of LINK, more than 400 million US dollars of WBTC, are already on the way......

A large number of retail investors are using leverage on Aave Take a carry trade, and if the ETH price crashes, things could get really ugly.

Everyone needs collateral to cover their leverage and sell their other positions.

If I were a VC or a market maker, I would play like this:

1. Liquidate them and go short at the same time;

2. Break the anchor of stETH, prompting the outbreak of the run, and the collapse of ETH price , and then buy stETH at a larger discount before the merger.

This article only studies a few major stETH holders, other whales may have other risks.

It seems inevitable. My goal is to get some outside opinion and see if I've missed anything.

Disclaimer: None of this is investment advice, please DYOR.

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