After Celsius Network suspended all customer withdrawals to stabilize its liquidity situation, rival crypto lenders reacted quickly to separate themselves from staked ether (stETH).
Lido Finance’s staked ether (ETH) is a type of ether (ETH) that permits staked crypto to be utilized in other trades through a method known as liquid staking. BlockFi CEO Zac Prince tweeted that the company had “zero stETH exposure” and Nexo’s decentralized finance (DeFi) strategist Kiril Nikolov.
So why all the excitement about staked ether?
Celsius is a centralized platform that aims to provide clients with returns. These returns originate from various DeFi loan activities, in which it earns additional income by using its own client cash. According to Celsius’s terms and conditions, customer deposits are seen as loans that the platform can use however it sees fit.
Celsius put clients’ ether into Lido Finance, a liquid staking system that allows ETH holders to stake on the Ethereum Beacon Chain and earn direct staking rewards, according to on-chain activity. The protocol returns stETH, which is a token that unlocks the underlying capital, allowing it to be utilized as collateral on future DeFi projects.
Why is staked ether important?
We know from on-chain evidence that Celsius used Lido Finance to stake substantial amounts of ETH on the Beacon Chain. It then used the underlying stETH collateral to generate further yield.
However, stETH recently ran into liquidity concerns on Curve Finance, a decentralized exchange where stETH is exchanged against ETH at a 1:1 ratio. This ratio has now become imbalanced, putting Celsius in a liquidity bind.
According to an examination of Celsius wallets by Larry Cermak, Celsius has at least 409,170 stETH in its wallets, valued at $463 million.
In the meantime, the Curve pool has 120,613 ETH and 515,018 stETH, a severely lopsided ratio of 19 percent ETH to 81 percent stETH.
This discrepancy has caused an operational problem for Celsius
Making it extremely difficult for them to convert their stETH holdings back to ETH in order to meet user withdrawal requests for the asset.
To make matters worse, stETH has lost its ostensible parity with ETH and is now trading at a 0.95 ratio. The end result is a catch-22 situation for Celsius, as it can’t sell stETH on Curve without further depressing its price and jeopardizing the value of its own customer funds.
Celsius did not respond to a request for comment on its investments right away. The role of stETH in the scenario was not immediately addressed by Lido Finance.
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