On Monday, after Celsius Network halted all customer withdrawals to restore its liquidity, rival crypto lenders reacted swiftly to separate themselves from the staked ether (stETH).
Staked ether is a kind of ether (ETH) offered by Lido Finance that enables staked cryptocurrencies to be utilised in other trades through a method known as liquid staking. The CEO of BlockFi, Zac Prince, tweeted that the company had “zero stETH exposure.” At the same time, the decentralised finance (Defi) strategist at Nexo, Kiril Nikolov, claimed that Nexo only has a “limited number of stETH.”
So why is everyone so excited about staked ether?
Celsius, a centralised platform, attempts to provide clients with returns from DeFi’s numerous lending activities, in which it uses customer funds to generate additional income. According to Celsius’s terms and conditions, customer deposits are seen as loans that the platform can utilise however they like.
Celsius is a centralised platform. Image: Currency.com
The on-chain activity demonstrates that Celsius moved clients’ ether to Lido Finance, a liquid staking protocol that enables ETH holders to stake on the Ethereum Beacon Chain and earn direct staking rewards. The protocol returns stETH, a token that releases the underlying money so that it can be used as collateral for more Defi projects.
Why is staked ether so essential?
According to on-chain statistics, Celsius staked substantial amounts of ETH on the Beacon Chain via Lido Finance. It then utilised the underlying stETH collateral to generate additional income.
However, stETH has recently encountered liquidity issues on Curve Finance, a decentralised exchange where stETH is often traded for ETH at a ratio of 1:1. This ratio has now been imbalanced, resulting in a liquidity crisis for Celsius.
The company possesses at least 409,170 stETH, valued at around $450 million. The Curve pool holds 120,613 ETH and 515,018 stETH, which is an extremely uneven 19% ETH to 81% stETH ratio. This discrepancy has resulted in an operational issue, making it difficult for Celsius to convert its stETH holdings back to ETH to fulfil user withdrawal requests.
Celsius possessed so many stETH tokens that it is nearly hard to convert them back to ETH without finding a counterparty via OTC.
In addition, stETH has lost its alleged parity with ETH and has been trading below a ratio of 0.95. Celsius is in a catch-22 scenario where it cannot sell stETH on Curve without further depressing its price and jeopardising the value of its customer funds.
Regarding its investments, Celsius did not immediately reply to a request for comment. Lido Finance did not immediately remark on the significance of stETH.