Lido Staked Ethereum (stETH), a staked, DeFi variant of Ethereum, has diverged sharply from the latter in the past 48 hours.
The token, which is supposed to trade at a 1:1 peg to ETH, is currently trading at $1,513.14 and has fallen 10% in the past 24 hours. By comparison, ETH is trading at $1,582.
stETH has been depegging since late-Thursday, with the first wave of losses stemming from a massive $1.5 billion dump by Alameda Capital– one of the largest holders of stETH. Alameda sold all of its holdings of the token.
stETH does not have a direct link to ETH prices. It can be redeemed for ETH only after the merge becomes effective- the date of which is currently unknown.
But the token’s main role as collateral on DeFi platforms such as AAVE and Lido could have dire implications for DeFi. Sharp losses in stETH are also causing panic selling in Ethereum.
How will stETH affect ETH prices?
stETH, which represents ETH currently locked on the Ethereum 2.0 beacon chain, is usually used as collateral to borrow more ETH on DeFi platforms.
But if its price falls drastically, positions which have borrowed ETH using the token are susceptible to being liquidated. Holders will be forced to sell stETH on the open market, causing an even bigger price drop for the token.
While this event has little direct impact on ETH prices, it appears to be causing panic selling of the second-largest cryptocurrency.
ETH prices tumbled over 11% in the past 24 hours. Uncertainty over the merge has added to the selling pressure.
Celsius, Lido could be caught in the crossfire
But even while stETH has minimal impact on ETH prices, its key role in leveraging with ETH on DeFi could burn those with high exposure.
Currently, DeFi platform Celsius has locked a lot of customer funds into stETH, which are liable to redemptions. If customers were to be spooked by the current stETH downturn, it could cause a bank run that would overload Celsius with redemptions, potentially causing a liquidity crisis.
DeFi majors AAVE and Lido, which have large holdings of the token, could also see a liquidity crunch if stETH selling intensifies.
DeFi already appears to be feeling the heat. Data from DeFi Llama shows that the four largest platforms- MakerDAO, Curve, AAVE and Lido have registered an average 6% drop in total value locked in the past 24 hours.
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