The report of CoinShares throws light on the notion that the decoupling of Lido Finance’s staked ether (stETH) and Ether (ETH) is similar to stablecoin collapse
CoinShares wrote in its report on 16th June that by definition, a stablecoin needs to follow its peg value with fiat currency in 1:1, but stETH has no limitations to remain in the same correlation with Ethereum. Additionally, the Ethereum network has not enabled withdrawals on the platform from staking as there remain no arbitrage opportunities that could keep control of the price.
Fundamentally, Staked Ether (stETH) itself is an Ethereum network-based token that represents ETH that is staked on the Proof-of-stakes Beacon Chain of the Ethereum network. In ideal situations, stETH is meant to keep a 1:1 relationship with ETH’s price, but it sometimes deviates from its path to keep a similar value.
Last month itself, the UST algorithmic stablecoin of the Terra network lost its peg from the US dollar; this resulted in the Collapse of the whole Terra ecosystem, whose shockwaves spread all over the crypto market. During the same time, stETH started trading about 2% less than ETH value while it went even below 6%.
However, CoinShares argued that this instance is not similar to the UST stablecoin crash, where it lost its parity with the underlying asset. As stETH benefits its users to earn while staking their ETH using the liquid staking technique. This staked ETH continuously secures the network following the plan while users have the accessibility to a liquid asset that is supposed to be invested. As per the CoinShares report, products provided by Lido Finance are termed premature considering their inability to unstake, which makes the feature of stETH incomplete.
Lido Finance has gathered enough power that it soon became a concern of the Ethereum community as the liquid staking platform has about one-third of total staked ether (stETH) in the locked form in its contract. Research Analyst Marc Arjoon wrote that since the underlying asset of ETH is locked and for introducing withdrawals, there is no planned date, so the prominent players in the market like crypto lending platform Celsius get forced to sell their respective holdings in order to meet the recovery of stETH.
Source: https://www.thecoinrepublic.com/2022/06/21/how-is-lidos-staked-eth-decoupling-different-from-collapse-in-stablecoin/