How stETH will impact the ETH price?

Translated by Ding HAN and Yalan WANG

1. As usual, I’d like to update the latest on-chain liquidation points [Figure 1]. The last 2 ETH on-chain liquidation points have dropped to 1250 and 1100 from 1460 and 1200 respective [Figure 2] on May 26 last time.

I have explained the reason for this last time, in fact there is no need to worry too much about on-chain liquidation, if the Ethereum price falls, many of these large orders will take the initiative to repay or add margin, because if they get liquidated by force, there will be a more costly slippage point. For example, MakerDAO start liquidation at the 150% level with a 13% of liquidation penalty.

Therefore, the on-chain liquidation point can be considered as the point where large investors or institutions consider it safe for a short period of time.

2. Regarding the issue of stETH, simply put, after staking ETH to 2.0, investors can only get the ETH back a few months after the ETH 2.0 is completed, but what if the investors may want to use these ETH? So some staking services, such as Lido, offer stETH, which is the voucher for Lido’s users to stake ETH 2.0, and each stETH corresponds to 1 ETH staking in the ETH 2.0 (kept 1:1 by daily rebase interest).

That is to say, stETH is the certificate of deposit of ETH 2.0, although the deposit is not cash , but the certificate of deposit also has value. If the investor takes a certificate of deposit of 1 million USD to the bank as collateral, he can take a loan with value close to 1 million USD (Loan secured by deposit).

Indeed, since certificates of deposit are less liquid than cash, so there should be a liquidity discount to cash, and in a bear market when liquidity is poor, the discount rate of certificates of deposit would be even lower, for example, the discount of stETH to ETH is currently up to 0.95.

3. As for stETH, will it be even lower, for example as low as 0.8? We cannot rule out that possibility, but it’s unlikely to occur, because ETH 2.0 is expected to be completed by the end of October to December, and then the staked ETH will be released in a couple of months. If you buy stETH at 0.8 ETH, which is equivalent to an annualized interest rate of 30% or more on ETH in 1 year, this is a huge temptation for many ETH standard investors: staking ETH 2.0 will allow you to earn 5% annualized interest, and there are 12.8 million staked ETH, not to mention 30%.

In addition, only ETH and stETH are involved in this kind of transaction, not USDT. The Tether becomes less liquid during the bear market, but ETH liquidity is not reduced as its volume remains unchanged.

4. Indeed, in case stETH fell down to 0.8 which is not impossible, at this time, some people will suffer losses due to their foolish operations.

For example, the financial platform Celsius, they may have been leveraging short term debt to long term investment, that means, they use users’ short term ETH deposit to stake on Ethereum 2.0 to generate interest. So what if the user wants to withdraw ETH? The Celsius will deposit stETH at AAVE and borrow ETH out then give ETH back to the user.

Since the Celsius deposits stETH to borrow ETH, there is a liquidation line, and the current liquidation line on AAVE starts at 0.8 ETH [Figure 3]. However, it is highly unlikely that Celsius will get liquidated, because unless most of its wealth management products is withdrawn, it can continue to add stETH to reduce the staking rate, I believe part of Celsius wealth management products is long-term fixed deposit that can not be withdrawn. Celsius can use this part of the long term fixed deposit to make up for the stETH collateral.

5. If the most extreme case happens, the Celsius would lose the discounted part of stETH, for example if there are 10,000 stETH being liquidated at 0.8 ETH, then it will lose 2,000 ETH, if Celsius itself doesn’t have funds to cover this lose, then in the end, this loss will be borne by the latest users who withdraws from the Celsius.

I believe in the end, Celsius will also take some actions, such as giving stETH to the users who participate in ETH wealth management products, claiming they have no ETH available, you can have stETH now, then reclaim your ETH in a couple of months, this is better than nothing. As for the 35,000 ETH lost by Celsius in the Stakehound private key loss incident, this is not a big problem as Celsius can afford to pay for these ETH.

There are also some fools who repeatedly deposit ETH. After depositing ETH to get stETH, they go to AAVE and lend out 0.8 ETH against 1 stETH and then deposit it at Celsius again. When they repeat the above process for 5 times they can get up to 3.4 times the interest (n times up to 5 times the interest), the cost is that if stETH falls below 0.7 ETH, their ETH will be lost.

6. All of the above, will have an impact on the depository market (stETH/ETH), technically it will not work for Tether/ETH market (for those who don’t know, they may be panic). Although the market is down, the volume & liquidity of ETH remain unchanged, just shifting from short-term investors to long-term hands, who are always happy to buy heavily discounted stETH to earn interest.

==========QA ===========

Q1: But is there any connection between the ETH plunge and the depeg of steth?

A: Since the price of ETH falls, those who hold stETH want to sell out and buy in ETH, resulting in the stETH to ETH exchange rate decreasing. This is a typical depository liquidity price decrease in the bear market.

Q2: Please take into account the unlimited ETH issuance mode.

A: Please go log in ultrasound.money and click “SIMULATE MERGE” to see figure 4, you’ll find that under the influence of the protocol EIP 1559 burning, there will be 500,000 ETH issued and 2.9 million ETH be burnt every year in the mode of POS. And the inflation rate of ETH will turn to -2.0% from the current 2.1%.

According to the bear market (for example, the last 30 days), ETH burning can reach 1.3 million per year, and the inflation rate is -0.7%.

Q3: The impact of ETH 2.0 changing into POS mode is far-reaching. As an application layer, the latest tragic example against the concept of decentralization is EOS.

A: EOS only has 21 nodes and several dozens of institutions while ETH has thousands of nodes and millions of stakers.

Q4: Isn’t the massive release of staking Ethereum after ETH 2.0 a kind of sell pressure?

Q5: But where is the price support for ETH if there is no longer a cost of physical equipment? After ETH 2.0, the number of ETH 2.0 produced per month would be 54,166 and the cost of producing an ETH is:

the number of servers (or PCs) of miners verifying people X the cost of a single server = 400,000x$40=16,000,000, so the cost (rough) of ETH is $295, among which the number of servers and verifications are variables, I took the middle value, nevertheless, there is still a big gap between the cost of one ETH and today’s price.

A: The ETH price is never supported by the cost of hashrate, instead, it’s the opposite, the ETH price that determines the cost of hashrate. The hashrate cost has at best only indirect psychological support.

Q6: ETH’s price support is the demand for free contract use, and this is the direct support which can be achieved by the burning mechanism in the protocol EIP-1559.

A: 1. If these people want to sell, they could long ago sell ETH though stETH and other similar methods.

2. Referring to that the staking rate of other POS chains is more than 30%, the current 10% staking rate of ETH(12.8 million / 121.4 million) is still too low, so the staking rate might be increased in future.

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