stETH token and the recent crypto liquidity crisis: What you should know?

What is Stacked Ethereum?

Each stETH token represents a unit of Ether that has been “staked” or deposited in what is called the “beacon chain”. Ethereum, the network underlying Ether, is currently transitioning to a new version, 2.0 which is supposed to be faster and cheaper to use. The beacon chain is a test environment for this upgrade.

Staking is a practice where investors lock up their tokens for a period of time to help keep a crypto network secure. In return, they receive rewards in the form of interest-like returns. The mechanism behind this is known as “proof of stake.” This is different from “proof of work” or mining, which requires a lot of computing power and energy.

This is an important part of decentralized finance, which aims to replicate financial services like loans and insurance using blockchain technology. StETH is not a stablecoin like tether or terraUSD, the “algorithmic” stablecoin that collapsed last month under the pressure of a banking panic.

How is it trading?

As we can see from the chart below, before the date of May 12, ETH and stETH were trading at almost the same price, as they should be. From May 12 onwards, we can clearly see a decoupling between ETH in orange and stETH which is here in blue. It seems that stETH is continuously trading at a 2% discount to ETH.

For now, as long as stETH is trading below ETH, there is no arbitrage opportunity but this will not be the case for long, stETH can be bought back for 1 ETH and sold for 1.X ETH.

stETH token and the recent crypto liquidity crisis: What you should know? - 4C Trading

When withdrawals will be allowed on the beacon chain, 1 StEth can be recovered for 1 Eth. We are talking about the chain which will be in fact Ethereum 2 (the Ropsten testnet has recently switched to PoS). This redemption will only be possible once Ethereum 2 is “activated”.

Celsius in all this?

As you know, Celsius stopped withdrawals a few days ago, everyone knows that, but what is perhaps less known is that Celsius holds a significant amount of stETH.

If the withdrawals are unblocked and investors decide to withdraw and sell them, this should cause the parity to fall even further, at least temporarily.

Conclusion

A stETH will always be equal to an ETH, even if the value of the first one can vary from that of ETH, as it is the case for the moment with a discount of about 2% for stETH.

If Celsius were to liquidate a large part of its stETH, there is no doubt that the latter would see its value drop on the secondary market.

One cannot, for the moment, buy stETH to resell it in ETH, but this should be possible in the future, so there might be an incentive to buy stETH, even if one cannot sell it right away and take advantage of the arbitrage. This is obviously not advisable for novice or risk averse investors.

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