Institutions are withdrawing from the stETH pool, will the run break happen?

Today's research topic is stETH/ETH, whose trading pair is running out of liquidity.

As we all know, stETH is the pledged version of ETH on Lido, and its purpose is to protect the security of ETH after the merger.

Therefore, there should be a one-to-one relationship between stETH and ETH, and there is a liquidity pool on Curve.

However, now the liquidity pool on Curve has become extremely unbalanced, and the proportion of stETH is close to 75%, an unprecedented tilt ratio.

As a result, the conversion ratio of stETH to ETH has become 1.03:1, and the degree of inclination is still increasing.

Theoretically, the rhythm of unanchoring is determined by the slope ratio of the liquidity pool and the A factor.

For A-factor questions, you can refer to @Tetranode's tweet . Simply put, the stETH pool is currently at a critical level, and unanchoring may accelerate at any time.

stETH and ETH are anchored one to one, and the merger will happen within a few months. Buying stETH now seems to be an arbitrage operation that can be profitable. This is very different from UST without asset support, so why are investors exiting? Woolen cloth?

I have observed that Alameda Research is exiting their positions. Within a few hours, close to 50,000 stETH were withdrawn regardless of slippage losses.

Alameda is known to have a good nose for the market...

In fact, they are one of the seven largest holders of stETH on Lido, and their move is likely to trigger a run.

Let's look at the other big position holders. Start with lending platform Celsius .

Celsius owns close to 450,000 stETH worth about $1.5 billion. They deposited these stETHs into Aave as collateral, lending about $1.2 billion in assets.

This might not be a big deal, but...

Celsius is rapidly depleting the redemption positions of its liquidity investors.

Using these billions of dollars of illiquid assets, they took out massive loans to pay off customers' redemptions.

Celsius is struggling, they have lost huge sums of money in hacks over the past year, and things are getting worse.

It started with them losing $70 million in a Stakehound event . (BlockBeats

Note: On June 7, according to Dirty Bubble Media, the encrypted lending platform Celsius Network lost at least 35,000 ETH in the Stakehound private key loss event. )

Then another $50 million was lost in the BadgerDAO theft .

In addition, $500 million in customer deposits was wiped out in the recent LUNA debacle . Their reckless handling of client funds is beyond words.

These are only the theft of public information, and it does not rule out other unknown thefts.

Investors are now redeeming their positions at a rate of 50,000 ETH per week, meaning Celsius has only two options:

1. Swap their stETH for ETH and then for Stablecoin to increase liquidity.

2. Mortgage stETH and repay customers with loans.

If they choose the first option, they hold about 450,000 stETH, but there are only 242,000 ETH in Curve's pool. Every sell-off will exacerbate the tilt of the exchange rate of the trading pair, which is a big loss for them.

There is also about $5 million of stETH liquidity on Uniswap. In addition, the liquidity of CEX is unknown. However, the liquidity on CEX, Uniswap, and Curve should not be enough to support them to sell all their positions. If they can, they should go directly to CEX instead of selling on Curve.

The trading pair of stETH is only ETH, (there is USDC trading pair on FTX, but the proportion is very small), which means that after stETH is replaced with ETH, ETH will also face selling pressure.

They have lent a lot of money in stETH, and these multi-billion dollar selling pressure will make their collateralization ratio more dangerous.

Let's say stETH gets severely decoupled or market conditions get worse.

Celsius can be liquidated. Borrowing becomes more expensive, their collateral loses value due to market conditions, selling below the peg makes them lose even more, and liquidity dries up. Negative feedback loop.

One more thing worth noting is how Aave will liquidate stETH, an illiquid asset.

Are they responsible for these assets, or are they forced to be illiquid for months while risking a drop in ETH price? What should they do?

It is very likely that Celsius was frozen for redemption before liquidation.

Celsius has only a few weeks of funding left and has suffered significant losses due to unanchoring, borrowing fees, and is also at risk of the merger being delayed. It seems to be only a matter of time before being frozen.

Let's not forget that they're not the only giant whales in this case. When other whales smell blood, they will push the envelope, shorting the futures market while liquidating other positions. Oh oh, that's probably why Alameda dumped 50,000 stETH for Stablecoin...

Asset management platforms like SwissBorg hold about 80,000 stETH of client assets . It can be found through their wallets that they put 27 million US dollars of stETH in the Curve liquidity pool, and there are 51,000 stETH available. If they withdraw from the liquidity pool and sell stETH, Celsius will be in a dilemma.

After the feast, the giant whales are leaving, who will be the first?

Looking at today's transactions, there have been some massive exits, including this one for 2400 stETH (approximately $4.2 million).

As the liquidity of stETH becomes less and less, I will continue to monitor other positions that Celsius needs to liquidate. About 7 million US dollars of LINK, more than 400 million US dollars of WBTC, are already on the way......

A large number of retail investors are using leverage to carry out arbitrage transactions on Aave, and if the price of ETH crashes, the situation may become very ugly.

Everyone needs collateral to cover their leverage and sell their other positions.

If I were a VC or a market maker, I would play like this:

1. Liquidate them while shorting;

2. Break the anchor of stETH, prompting the outbreak of the run, the price of ETH collapses, and then buy stETH at a large discount before the merger.

This article only studies a few major stETH holders, other whales may have other risks.

It seems inevitable. My goal is to get some outside opinion and see if I've missed anything.

Disclaimer: None of this is investment advice, please DYOR.