Making Sense of the stETH Discount

Key Insights

• Lido’s stETH is trading at a 5.6% discount to spot ETH after maintaining a 1:1 price ratio for over a year.
• While the slide was triggered by a liquidity crunch for large stETH holders, it was amplified by an over-reliance on the stETH : ETH Curve pool for price fixation.
• stETH is in the early stages of its natural price discovery. The discount that the market settles upon will likely close when staked ETH is unlocked on Ethereum’s Beacon Chain 6–12 months after The Merge is completed.

In recent weeks, the collapse of Terra coupled with a broader market contraction has stimulated the market’s appetite for liquid assets. Since Lido’s stETH is nothing more than a claim on illiquid staked ETH, demand for stETH has fallen off a cliff. stETH is currently trading at a 5.6% discount to ETH on secondary markets, causing many to fear a similar meltdown to the LUNA / UST unwind.

However, unlike Terra’s solvency crisis, the stETH situation is a matter of liquidity. In its current state, stETH a one-way system: ETH may be deposited into Lido, but it cannot be withdrawn. The current discount on stETH does not mean that it is “unpegged” from ETH — there is no active redemption mechanism so a peg does not exist. While the market has grown accustomed to the idea that 1 stETH = 1 ETH over the last 18 months, stETH has actually been long overdue for this re-rating.

stETH Primer