Cryptocurrency’s next big crash may be just around the corner due to Lido Staked Ether (stETH), a liquid token from the Lido protocol that must be 100% pegged to Ethereum’s native token, Ether (ETH).

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Notably, stETH’s ETH peg could drop by 50% in the coming weeks, raising the risk of “DeFi contagion” as Ethereum moves towards Proof-of-Stake. argues popular bitcoin investor and independent analyst Brad Mills.

Responsibility for more than 1 million ether risks default

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Specifically, investors deposit ETH into Lido smart contracts to participate in the “merger,” a network upgrade aimed at making Ethereum a proof-of-stake blockchain, also referred to as the “Beacon Chain.” As a result, they receive stETH representing their ETH balance wagered on Lido.

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Users will be able to exchange stETH for unsecured ETH when the Beacon Chain goes live. Additionally, they can use stETH as collateral to borrow or provide liquidity using various DeFi platforms to generate income.

But if the transition to ETH 2.0 is delayed, it could cause a major liquidity problem on DeFi platforms, Mills argues using Celsius Network, a crypto lending platform that offers up to 17% annual percentage returns, for example.

“If customers start to abandon Celsius, they will have to sell their stETH,” Mills explained. “Celsius is owed 1 million ETH. So 288,000 are not available until [the] Merger, ~30k lost, ~445k stETH and 268k liquid. Might cause a run.”

But despite unconfirmed rumors that Celsius might be insolvent, the best way to secure your funds is to control your own private keys. He adds:

stETH may not be “behind”, but the risk of DeFi infection in the cryptocurrency bear market is high.

Risks of infection?

Moreover, even centralized yield platforms may face insolvency risks due to their liabilities in ETH. argues market observer Dirty Bubble Media (DBM), citing the Swissborg cryptocurrency asset management service as an example.

Swissborg offers around $145 million worth of Ether daily returns, including 80% in stETH.

Daily Swissborg yield offers. Source: Official site

The firm has staked approximately 11,300 ETH of its total Ether holdings in Pool Curve stETH/ETH. Then on May 12, the ETH peg became unbalanced after the crash of Terra and stETH/ETH fell to 0.955 on the same day.

The exchange ratio of the delivered ether to Ethereum in 2022. Source: Coin Market Cap.

“How does Swissborg pay daily returns on these assets when the income from the staked Ether is locked up along with the principal,” DBM asks, adding that the firm could “get out of its entire stETH position,” thus forcing its ETH peg even lower. .

However, the warnings coincided with a whale dumping On June 8, he placed Ether positions for ETH.

Mills answered, stating that “the performance of stETH is no different from GBTC with a permanent discount.” In other words, selling pressure can be “relentless” when the market turns bearish and yields disappear.

He explained:

“When there is deep liquidity and arbitrage potential, quants, Wall Street raccoons [and] flashbois is milking the harvest. When the strategy goes against them, they will add relentless selling pressure.”

As of June 9, the stETH-ETH ratio has recovered to 0.97, still 3% below the estimated peg.

The views and opinions expressed here are solely those of the author and do not necessarily reflect those of Cryptooshala.com. Every investment and trading step involves risk, you should do your own research when making a decision.