What happened
Much ado has been made of the recent collapse of Terra (LUNA 0.56%), as well as the liquidity crunch that's ongoing at centralized crypto lender Celsius (CEL 0.17%). The sell-off we've seen take place in the crypto world has undoubtedly been accelerated by the unraveling of two key players providing much of the "plumbing" of the cryptocurrency market.
However, the performance of Lido Staked Ether (CRYPTO: STETH) relative to Ethereum (ETH 0.27%) could be an undercurrent to the Celsius discussion that's perhaps more important metric for investors to watch. Today, both tokens have appreciated roughly in line, with STETH rising 5.8% over the past 24 hours, as of 12:30 p.m. ET. Likewise, Etheruem has risen 6.1% over this same time frame, continuing a trend of outperformance for Ethereum relative to Lido Staked Ether.
CRYPTO: ETH
Key Data Points
The de-coupling of stETH prices relative to ETH (with Lido Staked Ether trading at a roughly 6% discount to Ether) has remained in place over the past week. This decoupling took place following Celsius' note that it was pausing withdrawals, transfers, and swaps on its platform.
As it turns out, Celsius had reportedly taken user deposits (in ETH) and staked a significant percentage of these deposits on Lido (LDO 0.69%), a liquid staking solution for Ethereum. Celsius would earn the staking rewards paid out by Lido, a liquid staking solution, then pay out the yield on its Ethereum deposits, making the difference between the two.
However, an increase in withdrawal requests from Celsius required the platform to sell much of its Lido Staked Ethereum on the secondary market, driving significant discounts for these tokens.
So what
Lido Staked Ether is the token investors on the Lido platform receive in exchange for their Ethereum. Those holding these tokens receive staking rewards from Lido's platform, along with the ability to redeem their stETH for ETH following the Ethereum merge. Various sources estimate the lockup period for most stETH tokens at between six months and a year, meaning investors looking to cash out their Ethereum would need to sell their stETH on the open market, and buy Ethereum.
Given the recent rush to liquidity in the crypto market as token prices continue to fall, selling pressure on stETH from large players such as Celsius and retail investors has driven a rather compelling discount between the two tokens. Considering the yield stETH provides, as well as its redeemable value for Ethereum, these tokens usually trade roughly in line. This 6% divergence between the two is a significant development that signals how highly investors value liquidity over yield in this market.
Now what
This recent decoupling certainly presents an intriguing arbitrage opportunity for crypto investors looking for exposure to Ethereum. Those who believe that Ethereum is a great long-term holding, and also want yield, will be able to pick up stETH tokens at a juicy discount, increasing the relative yield on these tokens over time. Like bonds, when the price of stETH drops, its yield to maturity increases for investors willing to stomach the risk.
On the other hand, it's unclear how long or how deep this marketwide liquidity crisis will become in the crypto market. Additionally, the stability of Lido may come into question, should stETH tokens come under enough pressure. There are many unknowns driving this discount right now, though most consider Celsius' troubles to have started the chaos.
