KEY POINTS
- Staked ether, or stETH, is a token that’s meant to be worth the same as ether.
- For the past few weeks, it has been trading at a widening discount to the second-biggest cryptocurrency.
- Instability in the token’s price has further constrained liquidity in the fragile crypto market.
Another controversial cryptocurrency is causing havoc in the digital asset market — and this time, it’s not a stablecoin.
Staked ether, or stETH, is a token that’s supposed to be worth the same as ether. But for the past few weeks, it has been trading at a widening discount to the second-biggest cryptocurrency, fanning the flames of a liquidity crisis in the crypto market.
On Friday, stETH fell as low as 0.92 ETH, implying an 8% discount to ether.
Here’s everything you need to know about stETH, and why it has crypto investors worried.
What is stETH?
Each stETH token represents a unit of ether that has been “staked,” or deposited, in what’s called the “beacon chain.
Ethereum, the network underpinning ether, is in the process of upgrading to a new version that’s meant to be faster and cheaper to use. The beacon chain is a testing environment for this upgrade.
Staking is a practice where investors lock up their tokens for a period of time to contribute to the security of a crypto network. In return, they receive rewards in the form of interest-like yields. The mechanism behind this is known as “proof of stake.” It’s different from “proof of work,” or mining, which requires lots of computing power — and energy.
To stake on Ethereum currently, users have to agree to lock away a minimum 32 ETH until after the network upgrades to a new standard, known as Ethereum 2.0.
Ethereum, the network underpinning ether, is in the process of upgrading to a new version that’s meant to be faster and cheaper to use. The beacon chain is a testing environment for this upgrade.
Staking is a practice where investors lock up their tokens for a period of time to contribute to the security of a crypto network. In return, they receive rewards in the form of interest-like yields. The mechanism behind this is known as “proof of stake.” It’s different from “proof of work,” or mining, which requires lots of computing power — and energy.
To stake on Ethereum currently, users have to agree to lock away a minimum 32 ETH until after the network upgrades to a new standard, known as Ethereum 2.0.
Decoupling from ether
When the Terra stablecoin project imploded, stETH’s price began trading below ether’s as investors raced for the exit. A month later, crypto lender Celsius started halting account withdrawals, which saw stETH’s value dropping even further.
Celsius acts a lot like a bank, taking users’ crypto and lending it to other institutions to generate a return on deposits. The firm took users’ ether and staked it through Lido to boost its profits.
Crypto contagion
Like many facets of crypto, stETH has been caught up in a whirlwind of negative news affecting the sector.
Higher interest rates from the Federal Reserve have triggered a flight to safer, more liquid assets, which has in turn led to liquidity issues at major firms in the space.
Another company with exposure to stETH is Three Arrows Capital, the crypto hedge fund which is rumored to be in financial trouble. Public blockchain records show that 3AC has been actively selling its stETH holdings, and 3AC co-founder Zhu Su has previously said his firm is considering asset sales and a rescue by another firm to avoid collapse.