Crypto hedge funds are dumping their holdings of staked ethereum with some analysts warning it could trigger the next big crypto crash.
Last month the collapse of the Terra-UST stablecoin caused fearful reverberations throughout the crypto-market.
This month all eyes are on Lido Finance and its staked-ethereum (stETH) token, which has the potential to not only cause another extreme liquidity crisis but also rupture the value of ethereum proper.
The price of ethereum (ETH-USD) has now slumped to $1,028 (£850), a fall of 15% in the last 24 hours.
Bitcoin (BTC-USD) has also collapsed 9% in the last 24 hours to $20,278, a low not seen since 2017.
The recent market frenzy has led financial analyst Vince Prince to announce on Twitter that ethereum “is now headed towards the $650 USDT area”.
The recently introduced Lido staking protocol has for the past few months been offering ethereum holders the ability to practice ‘liquid staking’.
Liquid staking allows investors to stake their ethereum, which is locked for a set amount of time, get daily rewards on that staked amount, and also receive a new crypto token called staked-ethereum (stETH).
Staked-ethereum (stETH) is a tradable liquid token that users get in return for depositing their real ethereum within the Lido protocol.
These stETH tokens can be lent, staked, and exchanged on crypto-markets and at the end of the staking period, they can then be used to redeem the ethereum locked with Lido at a 1:1 peg.
However, after the recent chaos rippling through the cryptocurrency sector stETH is now losing its peg to ethereum proper.
In the past 24 hours, the value of staked ethereum (stETH) has fallen below its usual parity with ethereum by 6%.
As of the time of writing, the Lido staked-ethereum (stETH) price is now $963, whereas ordinary ethereum is priced at $1028.
The reason for this is the lack of liquidity for stETH when large crypto-entities try to dump it on the market to meet customer redemptions.
The lack of buyers is leading to a growing disparity between the price of the staking token stETH and ethereum, with the 1:1 peg becoming increasingly unattainable, sending shivers of deja vu from the bitter experience with UST-Terra.
Read more: Crypto live prices
Crypto lenders and hedge funds such as Celsius and 3 Arrows Capital are showing signs of distress because of their exposure to stETH.
They have been dumping large amounts of stETH to meet customer redemptions.
Crypto hedge funds are struggling to meet customer redemptions.
On such crypto hedge fund is 3AC, and co-founder of cryptocurrency hedge fund 3AC Zhu Su signalled the entity was in distress and tweeted: “We are in the process of communicating with relevant parties and fully committed to working this out.”
Crypto lender Celsius Network also has a heavy stETH position and a core piece of Celsius’s Earn strategy relies on the staked ethereum token not losing parity with ordinary ethereum.
Another signal of calamitous news to come came when Celsius announced it had hired restructuring attorneys from law firm Akin Gump Strauss Hauer & Feld LLP to advise on possible solutions for its mounting financial problems.
On Sunday night, Celsius (CEL-USD) announced it was freezing all customer withdrawals, swaps, and transfers.
In a blog post on Medium, Celsius stated: “We are taking this action today to put Celsius in a better position to honour, over time, its withdrawal obligations.
“We are taking this necessary action for the benefit of our entire community in order to stabilise liquidity and operations while we take steps to preserve and protect assets.
“Furthermore, customers will continue to accrue rewards during the pause in line with our commitment to our customers.”
Lido Finance has 32% of the total amount of ethereum staked as the world’s second largest cryptocurrency transitions to a less energy-intensive ‘proof of stake’ method of validating transactions.
However, a researcher at the Ethereum Foundation has given a warning that Lido is holding so much of the staked ethereum that it could compromise the entire ethereum blockchain.
Ethereum Foundation’s Danny Ryan tweeted: “Lido passing 1/3 is a centralisation attack on PoS.
“We’re bad at assessing tail risk, but staking in Lido at these thresholds has a lot of it.
“In blockchain systems, tail risk isn’t even necessarily so far fetched. Systems tend to hit edge cases, systems tend to get exploited.”
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