Liquid betting firms could default on their Ethereum obligations if the merger does not go through.

The next major cryptocurrency crash could be just around the corner due to Lido Staked Ether (stETH), a liquid token from the Lido protocol that is said to be 100% pegged to the native Ethereum (ETH) token.

Notably, stETH’s ETH peg could drop by 50% in the coming weeks, raising the risk of “DeFi contagion” as Ethereum moves towards Proof-of-Stake (PoS), claims popular bitcoin investor and independent analyst Brad Mills. .

There are over 1 million Ether liability risks
Specifically, investors deposit ETH into Lido smart contracts to participate in The Merge, a network upgrade that aims to turn Ethereum into a proof-of-stake blockchain, also known as a beacon chain. As a result, they receive stETH, which is the balance of ETH used in Lido.

Users can exchange stETH for unsecured ETH when the Beacon Chain goes live. In addition, they can use stETH as collateral to borrow or provide liquidity using various decentralized finance (DeFi) platforms for profit.

However, if the switch to Eth2 is delayed, it could cause a major liquidity problem across all DeFi platforms, Mills argues, using the example of Celsius Network, a crypto lending platform that offers up to 17% annual interest returns.

“If customers start to abandon Celsius, they will have to sell their stETH,” Mills explained. “Celsius has a commitment of 1 million ETH. So 288,000 is not available before the merge, ~30,000 is lost, ~445,000 stETH and 268,000 are liquid. May cause a run.

Unconfirmed rumors that Celsius might be insolvent, the best way to secure your money is to have control over your own private keys. He adds:

“stETH may not be depegable, but the risk of DeFi infection in a cryptocurrency bear market is high.”
Risk of infection?
In addition, centralized yield platforms may also be at risk of insolvency due to their ETH liabilities, argues market observer Dirty Bubble Media (DBM) using the Swissborg cryptocurrency asset management service as an example.

Swissborg offers around $145 million in daily Ether revenue, including 80% access to stETH.

Daily Swissborg yield offers. Source: Official site
The company has placed approximately 11,300 ETH of its total Ether holdings in the stETH/ETH Curve pool. Then on May 12, the ETH peg became unbalanced after the crash of Terra and stETH/ETH fell to 0.955 on the same day.

Ether to Ether exchange ratio in 2022. Source: Coin Market Cap.
“How does Swissborg pay out the daily return on these assets when the return on staked Ether is locked up along with capital,” DBM asked, adding that the firm could “give up its entire stETH position,” leaving its ETH liability even higher getting lower.

Meanwhile, the warnings coincided with the whale dumping its Ether positions in exchange for ETH on Wednesday.

Mills responded that “the dynamics of stETH is no different from GBTC with a permanent discount.” In other words, selling pressure can be “relentless” when the market turns bearish and yields disappear.

He explained:

“If there is deep liquidity and arbitrage potential, quants, Wall Street raccoons [and] flashboys will milk the income. If the strategy goes against them, they will increase relentless selling pressure.”
As of Thursday, the stETH/ETH ratio has rebounded to 0.97, still 3% below the estimated peg.

The views and opinions expressed here are solely those of the author and do not necessarily reflect those of Cointelegraph.com. Every investment and trading move involves risk, so you should do your own research when making a decision.

Source: CoinTelegraph

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