The token associated with Ethereum’s largest liquid staking program has regained its 1:1 peg to ETH. After dipping as low as -7% in mid-June, Lido Staked Ether (stETH) has regained its peg and now trades above 0.997 per ETH.
Lido offers stETH tokens to Ethereum holders who lock their ETH on its liquid staking platform. Holders can trade the stETH ERC-20 token like they would trade Ether.
For a while, Lido DAO’s proprietary version of Ethereum looked like it might become the next DAO to collapse. Instead, it has mostly recovered. Unsurprisingly, the recovery coincided with the DAO increasing stETH’s APR after Ethereum’s Merge, an obvious way to increase bids for stETH.
Lido currently has approximately 4.4 million ETH staked on its platform and has paid out over 143,000 ETH in rewards to stETH stakers. It is the largest Ethereum liquid staking pool with 30% of all liquid staked ETH.
A point of clarification: The governance token of the LidoDAO, LDO, is entirely separate from stETH. LDO tokenholders do not receive revenue apportionments from the protocol, nor do they have any claim over the use of the DAO’s treasury. In contrast, stETH stakers do earn interest.
One-way peg promised to become two-way… sometime next year
At present, stETH’s peg is only one-way: 1 ETH staked into Lido is instantly redeemable for 1 stETH; redemptions for ETH are not allowed.
Lido claims it will enable redemption of stETH tokens for ETH at a 1:1 ratio once the Shanghai upgrade permits users to withdraw staked Ether.
It is, indeed, curious why stETH is trading so tightly at parity with ETH given that holders of stETH cannot redeem stETH for ETH through LidoDAO before Ethereum’s Shanghai upgrade. Ethereum developers have tentatively scheduled the Shanghai upgrade for sometime in 2023.
A rational market would discount the time value of money significantly, yet stETH and ETH are transacting within 0.1%. To contextualize how tight 0.1% is, consider that today’s prime rate ⏤ the lowest rate of interest at which USD may be borrowed commercially for one year ⏤ is 6.25%.
- After losing its peg in May this year, stETH spent several months trading well below ETH.
- It began to recover after the Merge on September 15, 2022.
- It rallied immediately after Lido raised stETH’s staking APR increased from 3.85% to over 5.5%.
According to Lido’s website, the APR for Ethereum staking currently yields 5.51% (re-staking LidoDAO’s Miner Extractable Value (MEV) rewards from its ETH holdings increased revenue to its DAO).
What happened to stETH’s peg?
In June, some observers alleged that institutional crypto traders like Alameda Research caused stETH to unpeg by selling stETH holdings. They claimed that wealthy traders started acquiring stETH from lenders like Celsius Network, selling ETH, and taking out short positions on ETH once it could fetch a more favorable price to stETH.
Crypto also generally had a bad year. Terra LUNA tanked in May 2022, sending shockwaves through the crypto market. Celsius Network, Three Arrows Capital, and Voyager Capital went bankrupt in the aftermath, potentially taking the majority of investors’ deposits and collateral for loans — including stETH — with them.
Lido’s ERC-20 token, stETH, has had a shaky performance since its launch in May 2022. Its de-pegging could have proved fatal. However, it’s beginning to recover post-Merge. In any case, all stakers on Lido will have to wait for the Shanghai upgrade sometime next year to withdraw their tokens.