The risks surrounding the synthetic stETH token remain in the market. Now, the token’s largest liquidity pool on decentralized exchange (DEX) Curve is rapidly drying up. That is, the pool has almost no liquidity.
Because of the loss of liquidity, investors find it difficult to sell their tokens. If the pool is completely empty, those who have not been able to sell before will have to resort to over-the-counter (OTC) markets.
However, over-the-counter sales are geared towards very expressive volumes. In addition, small investors do not have access to OTC, which does not allow them to exchange their tokens. Therefore, liquidations can cause even steeper losses in the price of stETH.
Liquidity loss and TVL
The stETH pool on Curve allows investors to exchange tokens for ETH. Since the beginning of May, your total amount blocked (TVL) fell from US$ 4.6 billion to US$ 621 million.
That is, the pool lost more than 92% of its liquidity in just over a month, according to data from Dune Analytics.
But the problem is not just the loss of TVL, as the pool is also unbalanced. It currently holds five times more stETH than ETH.
Therefore, those who want to exchange their tokens cannot find enough ETH to carry out the operation.
According to CoinMarketCap, one stETH is worth around 0.93 ETH. That is, the token has already lost 7% of its parity since May 20th.
The price dropped more sharply from the 10th, when the Three Arrows Capital (3AC) fund started to liquidate its stETH.
“I feel bad for retail investors because the Curve pool was the only way out,” said Vance Spencer, co-founder of venture capital investment firm Frameworks. “Institutionals can still get out of this with over-the-counter (OTC) deals, albeit at a significant discount, much higher than in the Curve pool.”
The discount on stETH has been in the spotlight of analysts as a telltale sign of the recent liquidity crisis in cryptocurrencies.
In times of high inflation and aggressive interest rate hikes, investors prefer to hold “liquid” assets that can be easily sold. In this sense, BTC (BTC) and Ether (ETH) are the preference of those who invest in cryptocurrencies.
The problem is that stETH is a synthetic token that, in theory, represents an ETH within the Beacon Chain network. And this token is tied to the ETH that are trapped in the network.
But this lock up period only ends between six to 12 months after Ethereum successfully completes The Merge update. And based on the latest estimate, implementation of The Merge could take until August.
This means that stETH owners would have to wait, at best, until August to withdraw their funds. Many chose not to take this risk and began to liquidate their positions, bringing the token’s parity down.
“stETH is in the early stages of its natural price discovery and the discount will likely close when the ETH left on the Beacon Chain is unlocked,” said Chase Devens, an analyst at data platform Messari.
Big investors withdraw liquidity
Until the collapse of the Terra blockchain, each stETH was worth exactly one ETH, almost like a stablecoin. it was traded one-to-one with ether. But after that, the token opened a gap of 2% to 3% against the price of ETH.
This difference never diminished; on the contrary, when the Celsius platform stopped withdrawals, the differential reached 6%. And now, with the problems of the 3AC fund – another big holder of stETH – the spread has jumped to 7%.
Consequently, some large holders have sold stETH to get ETH, mainly using the Curve pool. About 98% of the trading volume in the stETH/ETH pair passed through the pool.
Alameda Research, a digital asset trading company, sold $88 million worth of stETH in the pool. And 3AC sold over 400k ETH and stETH tokens in May.
“The reason the liquidity providers left is that once the parity ran out, they got a bad deal because they were selling ETH too cheap,” said Bob Baxley, chief technology officer at Maverick Protocol. “As the protocol lost liquidity, investors didn’t want to be locked into just stETH.”
As a result, they would rather sell stETH “cheap” than risk keeping it in their wallet and not have liquidity afterwards.
Curve’s pool holds approximately 111k ETH and 492k stETH, an indication that most investors want to sell stETH.