Ali Raza
Lido’s stETH token lost its peg from Ether six months ago. Since then, investors have been flocking to buy the token, and the growing demand has pushed it back to parity with Ether.
stETH is back at parity with Ether
Over the past week, stETH and astETH, the yield-bearing token for Aave, have reported more than $33 million worth of inflows. The influx of inflows is allowing stETH to attain parity with ETH.
Lido has recorded a rise in activity since the Ethereum Merge happened around two weeks ago. The Merge allowed Ethereum to transition from a proof-of-work to a proof-of-stake blockchain. The upgrade of Ethereum to PoS went on without a glitch, and Lido is now a key player in the Ethereum ecosystem.
The Ethereum PoS network allows crypto staking activities to secure the blockchain. Stakers benefit from an annual percentage return (APR). Lido stakes user deposits of Ether and issues derivative tokens like stETH that can be traded the same as normal ETH.
After the Shanghai upgrade goes live in mid-2023, staked Ether on Ethereum will be unlocked, and stETH will be redeemed on a one-to-one basis with the locked Ether tokens. Therefore, in theory, one stETH token is equal to one ETH.
stETH and Ether traded at parity for a while before the peg broke in June. As the value of stETH plunged against Ether, Lido Finance was forced to quell the fears of comparing stETH with the collapsed TerraUSD (UST) stablecoin.
At the time, Lido issued an explanation saying that the exchange rate between stETH and ETH did not reflect the backing of staked Ether tokens, and instead, it was caused by a plunging secondary market. The platform added that the market was finding a fair price for stETH because some participants were looking for liquidity. Lido said the depeg was caused by the collapse of Terra and withdrawals on large DeFi lending platforms.
However, even after the effects of the Terra Luna collapsed eased from the market, stETH failed to retain its peg, and it hovered at around 97 cents on the dollar as the market was uncertain about the Merge.
However, now that the Merge has been completed successfully, there is no more obvious risk facing Lido and stETH. Investors are now buying stETH, hoping that they will realize profits from the spread after withdrawals are opened in 2023.
stETH is not the only one that has benefited from the Merge. cbETH has also benefited after the spread between its price and Ether’s price dropped since the Merge. cbETH has also reported an inflow of smart money since the Merge.
Analysts expect the spreads on liquid staking derivative to drop after the Ethereum Merge, as these tokens record a notable inflow from eager investors. The Merge has not only helped Lido regain the stETH parity but also provided other benefits.
The APR on Lido has increased from 4% to 5.5% since the Ethereum Merge as it collects and stakes earned rewards from the Ethereum PoS test network. Rocket Pool, another participant in the liquid staking business, also increased the staking APR to 5.3% from around 4% after the successful Ethereum Merge.
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This article was written for Business 2 Community by Ali Raza.
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