What will become of Lido Finance as sETH gets depegged for the second time this month

stETH is a token representing staked Ether in the Lido Finance platform, combining the value of an initial deposit + staking rewards. A derivative token backed 1:1 by ETH. Users who stake their ETH on the Lido Finance platform receive the staked derivative in return.

Users/stakers can access the value of their staked tokens while staked. But what about its potential downside?

Landslide in play 

Lido’s staked ETH (stETH) token price has dropped to a 5% discount against Ether (ETH) for the second time in a month, amid fears of shrinking liquidity for the staking derivative.

Source: CoinMarketCap

Token holders are able to sell their stETH for ETH on the open market. But what if liquidity keeps declining? That’s exactly the case here. Due to the large selling volume, the pool has become unbalanced. Such is the case with Curve, the main DeFi liquidity pool. It now has a ratio of 22% ETH to 78% stETH as of the time of publishing. This is the most unbalanced that the pool has ever been.

The unbalanced pool signified one of the assets, stETH in this case, is becoming more illiquid i.e. it would become difficult to sell as there isn’t enough ETH liquidity to incorporate sell orders of stETH at current prices.

According to Curve, the current stETH/ETH pool asset ratio is skewed, with ETH accounting for 24.11% and stETH accounting for 75.89%. stETH de-pegged slightly.

Source: Curve

In fact, AlamedaResearch exited their position yesterday and unload nearly 50k stETH just in a matter of hours. CelsiusNetwork is quickly running out of liquid funds to pay back their investors who are redeeming positions. Well, sETH suffered a fresh 10% correction to make things from bad to worse for the platform.

But stay calm, right?

Well, that is what Lido Finance has prompted to do in this situation via a tweet on 10 June.

Staked ETH issued by Lido is backed 1:1 with ETH staking deposits.

The exchange rate between stETH:ETH does not reflect the underlying backing of your staked ETH, but rather a fluctuating secondary market price.

— Lido (@LidoFinance) June 10, 2022

Furthermore, the past month has witnessed a number of events have worked to destabilize the stETH:ETH exchange rate, including the Terra collapse, market-wide deleveraging, and now withdrawals from larger lending platforms.