Staked Ether Crises Due to Crypto Liquidity

Staked ether (stETH) is a cryptocurrency with the same monetary value as Ether. However, it has been trading at a widening discount to the second-largest cryptocurrency in recent weeks, stoking the fires of a liquidity crisis in the crypto market.

The stETH discount first appeared last month, when the Terra blockchain network and its stable coin UST crashed the crypto markets. Since then, stETH has typically traded at a 2-3% discount, but on Friday, stETH dipped as low as 0.92 ETH, representing an 8% discount to ether.

Why is Staked Ether on a downtrend?

According to Ape Board, a portfolio analyst from the blockchain intelligence firm Nansen, Celsius, a crypto lender that has been under fire after it blocked withdrawals last weekend, claiming "extreme market conditions," has 409,260 stETH tokens, worth nearly $470 million at current rates.

Analysts at Huobi Research Institute, the research organisation of the Huobi crypto exchange, Johnny Louey and Andy Hoo, claimed in a report Tuesday that Celsius had previously lost over $71 million from staking stETH on Stakehound because Stakehound mishandled the keys. The concern now is that Celsius may be forced to liquidate its Staked Ether, incurring significant losses and putting more pressure on the token resulting in a downtrend.

Concerned Celsius customers began a quick wave of redemptions at a pace of roughly 50,000 ETH per week, according to the report, and the platform was desperate for liquidity.

stETH, like many other aspects of cryptocurrency, has been caught up in a maelstrom of negative headlines impacting the industry.

Higher Federal Reserve interest rates have sparked a flight to safer, more liquid assets, resulting in liquidity concerns at big corporations in the industry.

Further, Elon Musk, the CEO of Tesla and SpaceX, was sued for $258 billion by a Dogecoin investor on Thursday. According to the complaint, Warren Buffett, Bill Gates, and others have questioned the worth of Bitcoin.

Investors are concerned that the drop in the value of stETH may affect even more crypto participants.

Ethereum just finished its much-anticipated merger dress rehearsal. The event's performance speaks well for Ethereum's upgrade, which investors estimate to happen in August. But there's no telling when it'll happen - it's already been postponed several times. The most recent updates on Ethereum's testnets have been favorable, giving those waiting for the Merge greater confidence.

So, when withdrawals are ultimately authorised, any discount in stETH will most likely be arbitraged away, but there will still be some discount until that unknown date occurs.