The recent discount of stETH against ETH has sparked widespread concern across the crypto community. With rumors swirling around distressed institutions like Celsius liquidating large holdings, the price of stETH has deviated significantly from its expected 1:1 peg with ETH—currently trading at around 0.937 on Curve. This depegging has raised fears of a potential "death spiral" similar to what happened with UST. But is that comparison valid? And more importantly, what drives stETH’s valuation, liquidity risks, and long-term stability?
Let’s break it down.
What Is stETH and How Does Lido Work?
stETH (staked ETH) is a tokenized representation of ETH staked through Lido, a decentralized, non-custodial liquid staking protocol. As Ethereum transitions from Proof-of-Work (PoW) to Proof-of-Stake (PoS), validators must stake ETH to secure the network and earn rewards. However, direct participation comes with barriers: a minimum of 32 ETH required per validator node, technical complexity, and illiquidity during the staking period.
👉 Discover how liquid staking is reshaping Ethereum's future—click here to learn more
Lido solves this by allowing users to stake any amount of ETH and receive stETH in return. This token accrues value over time as staking rewards are automatically reinvested, increasing the stETH balance. Once Ethereum fully enables withdrawals post-merge (expected in 2025), stETH can be redeemed 1:1 for ETH.
In essence, stETH offers exposure to staking rewards while maintaining tradability—a crucial innovation for capital efficiency in DeFi.
The Mechanics Behind Lido’s Protocol
Lido operates through two main participant roles:
- Depositors: Users who stake ETH and receive stETH.
- Node Operators: Trusted validators responsible for running the actual Ethereum consensus nodes.
When you deposit ETH into Lido, the protocol routes your funds to pre-approved node operators via smart contracts. Rewards generated from validation are distributed proportionally among stakers, node operators, and the Lido DAO treasury.
A key component is the Lido Oracle, which regularly updates the total staked balance and ensures accurate minting and burning of stETH tokens. This system maintains transparency and trustlessness—but also introduces smart contract risk, which we’ll explore later.
Why Is stETH Trading at a Discount?
Several interrelated factors contribute to the current discount:
1. Limited Liquidity
Despite being one of the largest liquid staking solutions—with over 4.1 million ETH staked via Lido (about 32% of all staked ETH)—the secondary market for stETH remains shallow.
Most trading volume occurs on decentralized exchanges like Curve, which hosts the deepest stETH/ETH liquidity pool. However, liquidity has dropped sharply—from $1.7 billion in mid-May to just $670 million by late June—due to market volatility and massive withdrawals.
At current levels, the Curve pool holds only about 120,000 ETH, meaning it can absorb roughly $133 million worth of stETH sell pressure. Compare that to Celsius alone, which held over 450,000 stETH at one point—far exceeding available liquidity.
Centralized exchanges offer even less depth. FTX is the only major CEX offering stETH trading pairs, but volumes are negligible compared to on-chain markets.
2. Surge in Short-Term Selling Pressure
During bull markets, institutions often use leveraged staking strategies: depositing stETH as collateral on platforms like Aave to borrow ETH, then re-staking that ETH to mint more stETH—effectively compounding returns.
However, in a bear market, this strategy backfires. As ETH prices fall, collateral values drop, triggering margin calls. To avoid liquidation, leveraged players must sell assets quickly—often dumping stETH due to its higher yield profile.
Recent on-chain data shows major entities—including Three Arrows Capital, Alameda Research, Amber Group, and Celsius—have offloaded significant stETH positions. Meanwhile, “smart money” addresses have reduced their collective holdings from 160,000 to under 28,000 stETH in a single month.
This sudden imbalance between supply and demand has created a self-reinforcing cycle: falling prices trigger more selling, deepening the discount.
3. Uncertainty Around Ethereum’s Merge Timeline
stETH functions like an unofficial futures contract on ETH—its value hinges on the assumption that withdrawals will eventually be enabled after the merge.
Any perceived delay in Ethereum’s upgrade roadmap increases uncertainty. The longer users wait to redeem stETH for ETH, the higher the opportunity cost—and thus, the greater the discount demanded by traders.
While core developers remain confident in a 2025 timeline, past delays have made markets cautious.
4. Smart Contract and Protocol Risk
Although Lido is governed by a DAO and uses audited smart contracts, no system is immune to bugs or exploits. The protocol relies on multiple critical components:
- Node operator registry
- Deposit and withdrawal contracts
- Oracle network for price reporting
Any failure in these systems could compromise user funds. As such, some investors apply a risk premium—reflected in the market discount.
Will stETH Enter a Death Spiral?
No—here’s why.
Unlike algorithmic stablecoins such as UST, which collapsed due to insufficient backing and flawed incentive mechanics, stETH is fundamentally backed by real ETH. Every stETH token represents a proportional claim on actual staked Ether secured on the Ethereum beacon chain.
There is no recursive dependency where falling prices destroy underlying collateral value. Instead, 1 stETH will always equal 1 ETH upon withdrawal eligibility.
👉 See how real yield assets are gaining traction in today’s market
Therefore, while short-term volatility may cause depegging, arbitrage opportunities naturally emerge as the discount widens. Long-term investors and arbitrageurs can buy discounted stETH, hold until withdrawals are enabled, and redeem at par—locking in risk-free profits.
Once forced selling from leveraged players subsides and market sentiment stabilizes, we should expect gradual re-convergence toward parity.
Frequently Asked Questions (FAQ)
Q: Can stETH go to zero like UST did?
A: No. UST lacked sufficient collateral and relied on volatile LUNA tokens for backing. In contrast, stETH is directly backed by staked ETH on Ethereum’s consensus layer—making a total collapse extremely unlikely.
Q: When can I withdraw ETH from stETH?
A: Withdrawals are expected after Ethereum completes its full transition to PoS in 2025. Until then, stETH can only be traded or used as collateral in DeFi protocols.
Q: Is Lido centralized?
A: While Lido uses a set of approved node operators today, governance is decentralized via the Lido DAO. Efforts are underway to further decentralize operator selection and reduce reliance on centralized entities like Coinbase or Kraken.
Q: Where can I trade stETH?
A: The deepest liquidity exists on Curve Finance. Some centralized exchanges like FTX also list it, but trading volume is minimal compared to DeFi markets.
Q: Should I buy discounted stETH?
A: For long-term ETH holders comfortable with illiquidity risk until 2025, buying stETH at a discount offers enhanced yield potential. However, traders should monitor protocol health and merge progress closely.
Q: How does stETH generate yield?
A: Yield comes from Ethereum’s base layer staking rewards. These are automatically compounded into your stETH balance daily via Lido’s rebase mechanism.
With strong fundamentals, growing adoption, and increasing integration across lending platforms and DEXs, stETH remains a cornerstone of Ethereum’s liquid staking economy. While short-term price fluctuations reflect macro pressures and leverage unwinds, the long-term outlook remains anchored in real asset backing and protocol resilience.
👉 Start exploring high-yield opportunities in liquid staking today