The failure of UST has started an unwell game of the Defi system, USDD has also lost peg in the past few days and most recently stETH lost it’s peg, some defi protocols have the possibility of default like Celsius being on the brink. Besides, the market panic sells price of BTC is: $22,000. So what is the cause, and is there a solution for all. In this article, Coincu will explain to you the full report behind it and you will get an overview of the event.
Before starting you need to understand some notions below:
- stETH: is a token that represents staked ether in Lido, combining the value of the initial deposit + staking rewards. stETH tokens are minted upon deposit and burned when redeemed. stETH token balances are pegged 1:1 to the ethers that are staked by Lido.
- ETH 2.0: Ethereum 2.0, also known as Eth2 or “Serenity” is an upgrade to the Ethereum blockchain most notably, the switch from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) model.
- Lido Finance: The largest platform provider of staking services for Ethereum, a practice that allows owners of the Ether cryptocurrency to earn passive income without having to sell their tokens.
- AAVE Protocol: is a decentralized lending protocol that lets users lend or borrow cryptocurrency without going through a centralized intermediary.
- Celsius network: is a regulated, SEC compliant, lending platform that enables users to receive interest on deposited cryptocurrencies or take out crypto collateralized loans.
The story begins when Ethereum announced the stake of 32 ETH to become a validator is a virtual entity that lives on the Beacon Chain, represented by a balance, public key, and other properties, and participates in the consensus of the Ethereum network. Individuals with a small amount of ETH want to participate but can’t afford it and whales like defi protocols have also jumped in. An example is LIDO Finance the largest Ether staking service which informs staking ETH to receive interest 4% APY and you will get stETH back with peg 1:1.
And then the story starts to get more complicated when:
- Lido Finance uses your ETH to deposit Ethereum accounts to receive the interest rate and slot validator but remember that quality deposit to ETH 2.0 will be locked to be activated, so when you stake ETH on Lido you can’t withdraw until the merge is active.
- Celsius let you stake stETH to get interest rates: 18% APY. Then Celsius uses your stETH to come to AAVE to Collateral and borrow ETH
- Other protocols involved such as AAVE, MarkerDao let you collateral stETH to borrow ETH with attractive interest rates.
- Big ventures involved: Alameda Research, Three Arrow Capital, Amber Group…
So after having stETH you can stake at Celsius to receive interest or go to AAVE as collateral to borrow ETH and so on a death spiral is created, in the end token is being exchanged on the market is just stETH.
How the Celsius Liquidity Crunch Is Linked to stETH?
To attract money flow as well as increase trading volume, Celsius also let users stake stETH to receive 18% APR, and Celsius is a crypto lending company is one of Lido’s principal clients used the amount of stETH when users stake in to continue to collateral and borrow ETH. The problem will be normal until 8/6 when 02 wallets withdraw more than 54,103 stETH each wallet, causing the first depeg on 8/6 with peg 0.97
And now 1 stETH you can swap 0.943 ETH
After the actions of 2 anonymous wallets, Alameda research swapped all of their stETH to ETH on 2 pools of Lido and AAVE. Other investors, including the Amber Group also swapped 83k stETH to ETH because of fear of ETH collapsing, so they still swapped from stETH -> ETH even though loss to protect their asset, then Domino’s chain effect to all other Defi projects.
Three Arrow Capital’s wallet originally had $130 million stETH (stETH staked on AAVE): They use 81k stETH to borrow 53k ETH. According to calculation ⇒ stETH/ETH < 0.88 will be liquidated. However, in today the 3AC has paid off the debt and withdrawn the balance on AAVE.
On June 13, Celsius announced pausing all withdrawals, Swaps, and transfers between accounts. Celsius didn’t have enough liquidity after the depeg and many people swapped stETH to ETH. The Celsius Fund holds only 27% ETH which is instantly liquid equivalent to 26k ETH. The remaining 73% is stETH 44% and ETH2 Staking 29% which cannot be withdrawn, needs to wait until unlocked and the merge is active.
Looking at the picture, we can also see that if Celsius does pause all, it will definitely not have enough liquidity for users and will fall into default. To save the situation, Celsius has chosen to collateral stETH to borrow other cryptocurrencies and swap to stablecoins.
Main DeFi wallet: 0x8aceab8167c80cb8b3de7fa6228b889bb1130ee8 -> So with 445k stETH, Celsius has used to borrow about 1.18 billion. As soon as Celsius borrows on AAVE and other protocols, the risk of liquidation increases when the price falls + depeg.
The movements of big Funds
So have any chance to rise again to save the situation, but the on-chain data shows: Alameda and some large funds after swap stETH -> ETH despite the loss, they transfer all to FTX to short the whole market. So the question is: Alameda swapped and then took a short immediately after announcing the risk of depeg and the risk of Celsius, they short ETH at price of ~ $1800. What do you think about that?
When large funds sell out their asset, it will create panic sell for small investors to sell off, causing the general market to be affected. The consequences of this happening make more liquidation of positions on other lending platforms such as Aave, MakerDAO and when Ethereum fails, all other tokens of the same type will be affected.
The complicated depeg of stETH opened the series of liquidation and panic sell the whole market. The Defi market is still a delicious piece of cake, but gradually revealing many serious problems, the holes in the operating system and maybe mark the decline of Defi.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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