Introduction

As crypto market experiences one of its worst times and a lot of legit analysists predicting even worst in days to come, we are going to take a look at a situation that is fairly relevant to market's sharp price dump; stETH de-pegging.

First of all we need to know what stETH is

I'm sure you already heard that Ethereum merge is around the corner sooner or later (fingers crossed) and that is a shift from POW to POS consensus mechanism. Meanwhile some contracts are deployed by different entities that enables ETH staking prior to ETH2 launch. If I'm not mistaken these contracts or protocols will give you yield now and a share of their revenue after launch since they have more validating power due to more staked ETH.

Lido finance is the biggest of these protocol/contracts that you can stake your ETH with them. Why are they so popular? because staking with lido is not the end; your capital is locked but you get stETH in exchange for your staked ETH. So, stETH is a liquid ERC20 token backed 1:1 with native ETH which gives you the possibility to have liquidity and participate in various DEFI activities; stETH leverages your market exposure and enables you to take positions (whether it's a trade or lending or anything else) while your ETH is staked.

What is the deal?

Well, you can redeem 1 stETH for 1 ETH when beacon chain launches and no matter what the price is. This means if you somehow manage to acquire 1 stETH for 1$ on the market (or in a case where the price of stETH is 1$), you are entitled to redeem 1 ETH after merge even if the price of ETH is 1M$!

What is the problem then?

Price of stETH were always close to ETH price (except for some short periods) and given the fact that it is fundamentally riskier it shouldn't have been the case. stETH strongly depends on success of the merge and if merge is delayed or failed this can have a very serious effect on it's price. Also we are in a stage of market were there seems to be low liquidity and demand for most assets.

This means people will sell stETH in various ways; one can stake their ETH with Lido, Trade their stETH for Stable coin and take short position on stETH, eventually buying same amount of stETH in lower prices. Also as market is going deeper everyday, a lot of stETH holders will cashout either to save their positions or to stop their losses.

We can say that right now there is very low demand for stETH and high supply. This leads us to the problem that is rising from celsius protocol, as they are(were?) one of the biggest holders of stETH and they had to sell their holdings to save their big position on bitcoin (at least for now). So, as mentioned in this thread, Things are getting ugly and market is starting to realize stETH fair price which it seems that it should be way lower than ETH itself.

Data & Analysis

Now that we are fully aware of the situation, it is time to take a closer look at some data and charts to get a better understanding of what is happening. We are going to look for some reasons explaining why there might be a de-pegging in stETH/ETH price. Lets start with comparing Price of stETH and ETH since the emergence of stETH.

Insights:

• Price of stETH is naturally always cheaper than ETH but the difference was always neglectable (peg holding tight)
• It doesn't seem that there is a relations between ETH price and de-pegging since there are few cases of low de-peg both in high and low trends.

It seems that most serious case of de-pegging is happening more recently so we better zoom in to take a closer look at the sight:

• It is obvious that lines started separating from May 12th and are still going in parallel with much more potential of falling apart in coming days.

Now let's take a look at stETH/ETH chart or the peg line:

Peg fluctuations were much more before 2022 probably because there were less stETH in market and not much liquidity in pools and some large trades could easily lead to depeg.

As mentioned before, decrease in demand and increase in supply can lead to price difference and this is indeed the case for stETH. In inquiring stETH-ETH Curve pool as the biggest pool it became evident that users are selling stETH more than buying it. they are swapping into ETH since they are aiming for a lower risk asset:

Demand and Supply stats are also confirming that more stETH selling is occurring

We are seeing a collusion of factors powering each other and leading the pool and whole market to a huge price crash. Not only selling stETH is increasing but also pool is getting emptier everyday. There were serious cases of withdrawals from curve pool that is obvious in next two charts (first one extracting from defi lamma)

This imbalance can lead to further de-pegging

With all that said, coming back from the most important point of this inquiry, we can say that stETH is way overpriced considering its inherent risks. It is not clear why these risks were not recognized from the beginning but market is choosing a different path now, which can lead to worsened situation.