FLASH NOTE: Lido - Selling is Temporary, Governance is Forever

Lido provides the most widely adopted liquid staking derivatives (LSDs) across many different chains, with over $8 billion in TVL and 90% market share on Ethereum. While Lido is covered in greater depth in an earlier research report, two new developments are worthy of a flash note. The first concerns the price parity of Lido’s stETH LSD, which has continued to decline versus ETH. The second is a proposed change in governance that better aligns the incentives of LDO holders with those who stake with Lido by introducing dual governance and veto power for stETH stakers.

stETH

One of the most widely discussed issues in crypto at the moment has to do with the stETH and its ability to maintain price parity with ETH. As of June 13, stETH has fallen to as low as 7% below ETH’s price.

stETH is Lido’s primary staking derivative: users deposit their ETH, Lido stakes it on Ethereum’s Beacon Chain, and users are given stETH which pays out ETH staking rewards. Users that want to earn the staking yield on their ETH can do so without being required to lock up their ETH. Lido, on the other hand, has to hold the locked ETH until well after the Merge, currently expected at some point in late Q3 or Q4.

While stETH, backed 1:1 with ETH, should in theory closely track ETH’s price, there is no direct way to arbitrage the price differences once stETH falls below ETH. Uncertainty as to when the Merge will occur has also put pressure on stETH in a market that puts a premium on liquidity.

Heavy selling combined with a depletion of ETH in the ETH-stETH Curve pool has put pressure on stETH’s relative price. With ETH now only 21% of the pool, the AMM price is automatically set at significantly below 1:1 (currently 0.952). Curve liquidity is rather limited, with only 128,000 ETH remaining. With no centralized desk cleared to trade it, no major custodians offering stETH services, and low trading volume and liquidity on the few centralized exchanges that have listed it, Curve will continue to be the primary place for trading. Once price on Curve reaches 0.89, the acceleration of price decreases get exponentially more drastic, and could lead to complete illiquidity. As a result, the stETH price has become extremely vulnerable in the short-term despite there being an explicit backing.