Partnered With:

How serious is the stETH risk when Lido is withdrawn?

Read this article in 22 Minutes

Is there a way for small retail investors to profit?

Original author:CryptoJoe(Founder, Rebirth DAO, Senior Trader)

CZGSWS, BlockBeats

StETH broke anchor, value fell to 0.95 ETH.

Liquidity is drying up. The fact that Money is pulling its Money, coupled with rumors that the lending platform Celsius is on the brink of bankruptcy, could trigger a massive sell-off by stETH, ANALYSTS Messari and I said@Riley_gmiWe've been working on this lately, and here are some of our findings.

First, what is Lido & AMP; StETH?

Lido provides ETH liquidity pledge service for users. Users can lock up any amount of ETH and then receive equity Token stETH for earning income in DeFi.

After the merger, each stETH can be exchanged for 1 ETH normally.

Each stETH can only be redeemed at the top of the beacon chain. Before that, the 12.8 million ETH in ETH 2.0 pledge contracts is illiquid.

Lido holds 32% of the 12.8 million ETH (approximately 4.1 million ETH)

Before we delve into Celsius's balance sheet and track Smart Before the Money address, let's look at how stETH should be priced:

As Lido said, stETH anchors ETH (on the beacon chain) and now the market is now starting to re-price stETH at fair value.

But given the liquid dynamics of the investment, how much of a discount to stETH's price is fair?

StETH pricing should be determined by a combination of 4 things

· Current market demand for liquidity (demand/supply)

· Volume and liquidity in the current market (how the market reacts to selling pressure)

· Likelihood of successful/delayed merger

· Smart contract risk

For detailed

1. Desire for market liquidity

Demand for liquidity rises and falls at different stages of the market cycle. Liquidating positions is easy and cheap when prices are rising and liquidity is high, and vice versa.

Through on-chain data, we've seen massive withdrawals from stETH, such as crypto finance service Amber, whose wallet address has withdrawn more than $140 million worth of stETH from Curve Pool.

This has been a growing trend over the past few days and may be a sign that a bigger potential sell-off is brewing.

In this case, the most critical supplier is the crypto lending platform Celsius. If someone believes Celsius is going to be forced to dump a lot of stETH, it dramatically changes our emphasis on supply and demand.

The key question is how much can the market absorb and at what cost?

So what about stETH's liquidity?

2. Trading volume and liquidity in the current market

Total liquidity in the pool dropped more than 20 percent in the wee hours of this morning, and wallets associated with Alameda Research sold off, as Celsius mentioned before I posted this.

Amber's withdrawal of more than $150 million of stETH liquidity is significant and likely just a warning of a sell-off.

This is $150 million, which could be put on the market in the next few days.

The second is that the liquidity pool at Curve becomes extremely unbalanced, which is dangerous and greatly increases the risk of decoupling.

3 the pool from the Curve & have spent Extraction of liquidity is the first shot leading to UST collapse. Less liquidity = more risk.

The point is that, given stETH's closed liquidity structure, many institutions and ordinary participants are exposed.

Those stETH that enter the market could hit the market hard.

3. Likelihood of successful/delayed merger

The penultimate risk is the possibility of beacon chain delays or even failures, which would affect stETH. As some Kols have pointed out, stETH is similar to ETH futures.

In this sense, if the merger is delayed and it takes 6-12 months to get ETH back after the merger, locking in the Token will increase the liquidity cost, which is far greater than the gains gained during this period.

4. Smart contract risks

Demand/liquidity/merger risks aside, there are smart contract risks.

Pricing is simple, based on the cost of insuring a Lido deposit contract on Nexusmutual (2.6 per cent).

Thus, the smart contract risk ALONE (minimum risk) in stETH is at least 2.6%, which is roughly the current discount of stETH/ETH.

This suggests that the risk of stETH has been grossly underestimated.

A case similar to stETH's pricing method is GBTC, because they are closed.

If you want to sell your GBTC position, you have to sell it in the secondary market because it is a closed-end fund. Until it is converted into ETFs, the secondary market is the only alternative to liquidity.

If you want to sell your stETH, you have to sell it on the secondary market until the merger.

In both cases, this liquidity, open risk and supply and demand dynamics are underlying factors that influence the fair value of the asset in the market.

But in this case, why would one trade at a 3% discount and the other at a 30% discount, not to mention stETH's smart contract risk factor with Lido?

Lido's seven investors created a similar situation to UST: A16Z, Alameda Research, Coinbase, Paradigm, DCG, Jump Capital and Three Arrows Capital.

Similarly, Blockfi, one of the largest holders of GBTC, has lost more than $500 million.

This is already reflected in the valuation of Blockfi, which is in the process of raising a new round of funding at a $1 billion valuation, up from $3 billion in March 2021.

What's the point? Many of the big players in the game are often wrong, in this case completely misestimating the liquidity costs of GBTC and stETH, both of which are liquidity black holes in this case.

So ultimately, we think the one-year pledge yield for this liquidity trap is too low.

Perhaps the figure should be similar to GBTC at 30%, but not 3%.

Now, let's look at what's happening in the market right now:

Liquidity has dried up, whales and smart money are for sale.

The number of stETH held by smart Money addresses dropped from 160,000 stETH to 27,800 stETH in a month.

In fact, Alameda sold 50,615 stETH to the market in two hours on Wednesday.

It is likely that someone deliberately pulled the anchor towards stETH's clearing price.

Leveraged stETH holders risk liquidation if they do not have enough collateral.

For example, at stETH=0.8 ETH, $299 million will be liquidated.

The emphasis here is on the short term. I ultimately believe people will be happy to buy stETH at a discount. But the situation changes slightly when some institutions have to sell.

One organization that might have to dump is Celsius.

By performing on-chain analysis, I can calculate Celsius assets and liabilities.

Total assets of $3.48 billion, loans of $1.11 billion, net assets of $2.374 billion (assuming Celsius holds 45% of its CEL Token supply, worth about $100 million).

A complete breakdown of the assets held is as follows:

* Note that this is just their assets in DeFi, no one knows what crypto assets they hold elsewhere (e.g. CEX).

They claim to own about $10 billion of TVL, but that's all I could find.

The important part here is that Celsius is stETH's whale keeper. In fact, they are the largest interest-bearing stETH holders (on AAVE).

If we analyze Celsius ETH holdings, we find that 71% of them are illiquid or low liquid.

$510 million of ETH is locked up in an ETH2.0 pledge until the merger.

$702 million is in stETH and cannot be easily exited through the liquidity pool.

What happens if Celsius users want to redeem their money?

Are they redeeming it?

Why did they activate "HODL mode" on the account?

On October 8, 2021, Celsius reported that its AUM exceeded $25 billion. Celsius, a private company, has only released its financial data for years 19 and 20, but it did not release new numbers in 2014, despite repeated calls from investors on various social platforms.

The company also did not release an audit report. They were issued in '19 and' 20, but not in '21.

On December 20, 21, they andChainanalysisThe partnership released a report that confirmed the record of users depositing more than $7.609 billion on the platform and withdrawing more than $4.29 billion since its 18-year launch.

Celsius had on-chain assets worth $3.31 billion as of December 20, according to the report.

The company reported administrative expenses of $35 million, 40 percent higher than the cost of sales.

The lack of transparency makes investors worry about the possibility of a run.

The firm currently holds debt in stable currencies rather than positions in ETH, BTC and LINK, exposing them to market risk of cryptocurrency price downside.

If the market collapses, they will face a debt crisis.

There was an outflow of $750 million ($150 million ETH and $150 million BTC) following Terra's collapse (May 6-12).

In the last two weeks of May, the company had a net outflow of $450 million.

Even if we ignore the unreported week, Celsius experienced an outflow of $1.2 billion.

Such outflows increase the risk of a run.

The chart below shows the outflows over the past five weeks. The total withdrawal amount for the past 5 weeks is 190K ETH.

Compared to the previous five weeks, Celsius had 50K inflows.

Celsius's ETH and general assets have been experiencing massive withdrawals.

They have now enabled "HODL mode", which prevents users from withdrawing money from Celsius.

Another problem with Celsius is that only 29% of Celsius ETH is mobile:

1. Liquidity ETH

Most ETH was deposited in AAVE (150K ETH) and COMP (45K), with both positions secured against about 45% of LTV's assets.

They must pay off the loan before they can withdraw their ETH.

2. ETH of 458K is in StETH

For the liquidity pool on Curve, ST-ETH and ETH are highly unbalanced, and only 250K ETH is matched with 642K stETH. If Celsius wanted to exchange all St ETH, they would only get 250K ETH.

3. 324K ETH is stored in AN ETH 2.0 contract and will not be available to Celsius for at least 1-2 years

- 158K was obtained through Figment.

- The remaining 166,400 were acquired through the Ethereum Foundation ETH 2.0 contract.

Besides, they are inLost $70 million in the Stakehound incident.

(As Reported by Dirty Bubble Media on June 7, 2014, encryption platform Celsius Network lost at least 35,000 ETH keys in a key loss incident.)

And then in$50 million was lost in the BadgerDAO theft.

In addition to that,Half a billion dollars in customer deposits went up in smoke in the recent LUNA crash.

So how do you trade to profit from this situation?

We have seriously considered and contacted market makers and searched DeFi. You need to find a place to borrow stETH, and then sell, and there is no contract, it is a little difficult to make money from it.

There are two main ways to do this.

1. Over-the-counter markets.

If you are a large institutional participant, you will have access to market makers and brokers who can lend you stETH with your ETH collateral.

This is impossible for 99% of market participants.

2. Euler finance

You can deposit ETH at 4% carrying cost and borrow wstETH to sell on Curve, Uniswap or 1inch.

The profit/loss ratio of the transaction is good because the biggest cost is that ETH is back anchored and you have to repay the loan; That would be a loss of about 5-6%.

Like UST, it is a cheap market bet given the limited upside risk of a stETH/ETH value exceeding 1:1.

Another way to profit from the deal is to buy stETH at a discount. If stETH trades at a greater discount than GBTC (30%), and there are forced sellers on the market in Celsius and others. For us, this felt like a good opportunity to convert any ETH holdings to stETH.

Another way to profit from the deal is to buy stETH at a discount. If stETH trades at a greater discount than GBTC (30%) and there are institutions in the market that must be sold (such as Celsius or another). For us, this feels like a good opportunity to convert any ETH holdings into stETH.