Try Quests to earn crypto[Lido] stETH vs ETH (June 2022)
-- Date: 8 June 2022 -- Author: mar1na (catscatscode) -- Lido Q2: How has the price of stETH compared to ETH? Are there any events that triggered a big difference in price between the two tokens?
Introduction
Lido allows Ethereum users to stake Ether without delegating to a validator, needing to submit a minimum amount, and losing access to liquidity. On Lido, users can exchange their Ether for an equivalent amount of stETH, which allows them to earn staking rewards and maintain access to liquidity at the same time.
The exchange of ETH for stETH takes place at a 1-to-1 exchange rate. However, the market place of stETH in other transactions is in practice not always equal to the price of 1 ETH.
This dashboard examines instances of such de-pegging of stETH from ETH, and explores possible reasons behind the largest de-pegging events.
Methodology
The analysis timeframe starts on 1 January 2021 and ends at the time of analysis (8 June 2022).
This analysis compares the average prices of stETH and ETH tokens at hourly intervals, to avoid smoothing out the price differences with daily averages.
To calculate stETH prices by the hour, this analysis uses the fact_hourly_token_prices Ethereum table. Hourly ETH prices come from the ERC20 token balances table.
Data Results
The hourly prices for stETH and ETH remain close, but not identical much of the time:
In percentage terms, much of the time the stETH price has remained below the ETH price, usually within 5% or less:
Why does stETH depeg from ETH?
If stETH is designed to be a liquid equivalent to staked ETH, why is its market price so often below the ETH price? Reasons may include, but are not limited to:
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stETH not being a desirable asset for its main purpose - liquidity (aka stETH liquidity shortage which doesn't allow seamless trading after staking).
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macro-level factors and events: a shift into an overall crypto bear market, the volatility in May 2022 due to Terra's crash of UST and LUNA,
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continuous postponement and uncertain timeline of the Ethereum Merge, until which it is impossible for users to unstake their original staked ETH on Lido, making stETH an inherently risky asset at least until that point (see Lido blog for more discussion).
Depegging is not desirable from the point of view of Lido Protocol, because receiving a lower value asset in return for their ETH (at the 1 ETH -> 1 stETH rate) will discourage users from staking ETH on Lido. Lido governance has attempted to address this (see Lido forum post below for context). Lido assessed that stETH is less desirable and therefore cheaper than ETH on the market as a result of there not being enough liquidity pools on DEXes to conduct swaps with stETH and utilize its liquidity to the fullest (see governance proposal). The solution proposed by Lido in January 2021 was to incentivize stETH liquidity on Curve using LDO (Lido DAO governance token) rewards. The chart above reveals that since the beginning of 2021, the magnitude of stETH depeg has indeed reduced. Most of the time stETH price is within 5% of the ETH price, while in the first half of 2021 it had fallen 10-12% below ETH.
