A cryptocurrency is causing havoc in the cryptocurrency market, and this time it’s not a stablecoin.
Staked ether, also stETH, is a cryptocurrency that is meant to have the same value as ether. However, in the last few weeks, stETH has been trading at a widening discount to Ethereum, the second-largest cryptocurrency by market cap, triggering liquidity fears in the cryptocurrency market.
On Friday, the stETH price fell to 0.92 ETH, which translates to an 8% discount on ether.
Here is what you should know about the stETH cryptocurrency and why it has cryptocurrency investors worried.
What is stETH?
Every stETH token represents a unit of ether “staked” or deposited in what is known as a “beacon chain.”
Ethereum, the blockchain network on which ether runs, is planning to upgrade to a new version that will be faster and cheaper to use. The beacon chain is used as a testing environment for the upgrade.
Staking refers to a process in which investors lock up their tokens for some time to contribute to the security of a cryptocurrency network. They in turn earn paid interest as a reward. The process behind this is called “proof of stake.” It works differently from “proof of work”, or the mining process, which requires more energy and computing power.
Currently, to stake on Ethereum, users must agree to lock away at least 32 ETH until the blockchain network upgrades to a new standard called Ethereum 2.0.
Unlike terraUSD, stETH is not a stablecoin. It operates on the idea that stETH holders will redeem their tokens for the same amount of ether after the network is upgraded.
Decoupling from Ether
After the collapse of the Terra stablecoin, the stETH price began to trade below that of ether as cryptocurrency investors rushed to exit. A month later, Celsius, a cryptocurrency lender, halted all withdrawals citing “extreme market conditions.” This sent the stETH price down further. The company has asked its customers for more time to solve the issues it is currently facing.
Data from DeFi analytics site Ape Board shows that Celsius has over $400 million in stETH deposits. Cryptocurrency investors fear that Celsius will sell its stETH, an event that will result in heavy losses and push the price of the token further downwards.
Besides that, stETH holders will not be able to redeem their coins for ether for six to 12 months after an event called the “merge” meant to complete Ethereum’s transition process from proof-of-work to the proof-of-work concept.
This means that stETH holders will be stuck with it unless they decide to sell it on other platforms.
The decline in stETH price has also raised concerns about the security of Ethereum. Almost a third of all Ether locked in Ethereum’s beacon chain has been staked through Lido. Some cryptocurrency investors think that this may give too much control of the upgraded Ethereum blockchain network to a single entity.
Recently, Ethereum completed a dress rehearsal for its much-awaited merge. This is good for Ethereum’s upgrade, which cryptocurrency traders expect to happen in early August. However, no one knows when it will happen as it has been postponed many times.
“The latest updates on Ethereum’s test nets have been positive which brings more confidence to those waiting on the Merge,” said Mark Arjoon, a research associate at CoinShares, a cryptocurrency asset management firm.
“So, when withdrawals are eventually enabled, any discount in stETH will likely be arbitraged away but until that unknown date arrives there will still exist some form of discount.”
Other Crypto News
In some of the latest Bitcoin news, the price of the leading cryptocurrency by market cap is currently trading above the $21,000 mark on most cryptocurrency exchange platforms. At the time of writing, the BTC price was about $21,458 on exchanges like Coinbase, Binance, and CoinMarketCap. The following BTC to USD chart shows the changes in the Bitcoin value in the last 24 hours.
Ethereum is trading above the $1,100 mark. At the time of writing, the Ethereum price was about $1,167 on Coinbase, Binance, and Coin Market Cap.