- Analyst Brad Mills says that investors should be wary of their staked ETH while dealing with high yield generating platforms.
- If the market turns bearish and yields vanish, it could trigger liquidations causing major de-pegging of staked ETH.
After the episode of the Terra LUNA collapse, news of crypto de-pegging sends shivers across the crypto community. Now, the latest report suggests that the Lido-staked Ether (stETH) could lead to the next big crypto crash.
The stETH is a liquid token from the Lido protocol which is pegged 100 percent with Ethereum’s native token. But independent analyst Brad Mills has suggested that the stETH peg could drop by 50 percent over the coming weeks. Now that Ethereum is preparing a move to Proof-of-Stake, this could possibly raise the risk of “DeFi Contagion”.
Currently, investors have been depositing ETH in Lido’s smart contracts in order to participate in The Merge upgrade on the Ethereum blockchain. This upgrade will help Ethereum to move toward a Proof-of-Stake (PoS) platform. As part of the deposit, the investors also receive stETH which represents their staked balance with Lido.
Related: Ethereum successfully launches Beacon chain on Ropsten testnet,
Just as The Merge upgrade or the Beacon Chain goes live, investors can redeem stETH for the unstaked ETH. Additionally, they can also use stETH as collateral to borrow and provide liquidity through various decentralized finance (DeFi) platforms and earn yield.
Celcius Network bank run Possibility, 1 Million ETH at stake
Analyst Brad Mills said if the switch to ETH 2 gets delayed for any reason, it could potentially lead to a major liquidity problem across DeFi platforms. This problem will appear on the crypto lending platform Celcius Network that currently offers 17 percent annual percentage yields. He wrote:
If a Celsius run on the bank happens, and Celsius is forced to start selling their stETH, there would be a depegging of 50% on stETH. If this happens, people who are leveraged up on AAVE/Instadapp/Defisaver for “the merge” will be liquidated.
Furthermore, there have been reports in the market that the Celcius Network could turn insolvent. But regardless of this possibility, investors should control their funds by having access to their own private keys. Mills adds: “stETH might not ‘depeg,’ but the risk of DeFi contagion in a crypto bear market is high.”
Risks can spread to centralized Yield platforms
Due to high ETH liabilities, centralized yield platforms like Swissborg could be at risk of insolvency. Another market commentator Dirty Bubble Media (DBM) explains this in a detailed thread.
He notes that Swissborg offers a daily yield on $145 million of ETH that it holds. This also includes 80 percent exposure to stETH. Out of its total ETH holdings, Swissborg has staked around 11,300 ETH in Curve’s stETH/ETH pool. During the Terra collapse last month, this ETH peg faced imbalance as stETH/ETH dropped to 0.955 on the day.
Dirty Bubble Media further questions: “how is Swissborg paying daily yield on these assets, when the yield from staked Ether is locked along with the principal??”
Mills has warned that the selling pressure can be “merciless” if the market turns further bearish and yields vanish. “When there’s deep liquidity & potential to arbitrage, quants, Wall Street raccoons [and]flashbois will milk the yield. When the strategy goes against them, they will add merciless sell pressure,” he said.
Related: Is Ethereum supply imbalanced? Analyst spots serious flow problem