Research Summary
The report discusses the dynamics of staking Ethereum (ETH) using Lido, a protocol that allows users to stake ETH and receive stETH in return. The stETH token represents the staked ETH and its earned rewards. The report also explores the concept of stETH’s “peg” to ETH, emphasizing that stETH is not pegged to ETH but trades at market price based on demand/liquidity for staked ETH. The report further delves into the implications of stETH trading below 1:1 with ETH, the potential risks involved, and the impact of market conditions on stETH’s price.
Key Takeaways
Understanding Lido and stETH
- Lido’s Functionality: Lido is a protocol for staking ETH. Users stake ETH and receive stETH in return, which represents their staked ETH and its earned rewards.
- stETH’s Relation to ETH: stETH is not pegged to ETH. It trades at market price based on the demand/liquidity for staked ETH.
- Redemption of stETH: stETH can be redeemed for the underlying ETH after the Ethereum developers complete the merge and the subsequent fork.
Market Dynamics and stETH Pricing
- Market Conditions Impact: In a bull market, demand for ETH is high, making stETH attractive. In a bear market, demand for ETH decreases, and the desire for liquidity becomes apparent, leading to a potential discount in stETH’s price.
- Forced Sellers: Certain groups, such as leveraged stakers and entities requiring deposit redemptions, could become forced sellers of stETH, impacting its price.
- Liquidity Discount: The current lack of a redemption path for stETH causes a liquidity discount.
Risks and Implications
- Slashing Risk: If Lido validators experience slashing, the loss is socialized among stETH holders, potentially reducing their stETH balance.
- Protocol Bug Risk: A critical bug in the Lido protocol could impact the redemption of stETH.
- ETH2 Delivery Risk: There is a risk associated with the delivery of ETH2, which could impact the redemption of stETH.
Actionable Insights
- Investigate the Potential of stETH: Given the dynamics of stETH and its relation to ETH, there may be opportunities for arbitrage, especially as the merge and state transitions on the beacon chain get closer.
- Consider Market Conditions: The attractiveness of stETH can vary based on market conditions. In a bull market, stETH could be an attractive way to earn extra ETH, while in a bear market, the desire for liquidity could lead to a discount in stETH’s price.
- Assess Risks: It’s crucial to consider the potential risks associated with staking ETH using Lido, including slashing risk, protocol bug risk, and ETH2 delivery risk.
