As a seasoned crypto investor with a decade of experience under my belt, I find myself constantly navigating the dynamic and ever-evolving landscape of digital assets. The recent concerns surrounding the long-term price stability of cryptocurrencies tied to liquid staking protocols are not new to me, but they do pique my interest.
Investors are starting to worry about the long-term price consistency of cryptocurrencies linked to these $45 billion liquid staking protocols, as this sector raises questions about their stability.
Investing with liquid staking enhances financial efficiency for investors, as it allows them to essentially have a duplicate of their initially staked token, which can then be utilized within various decentralized finance (DeFi) platforms.
Yet, it’s possible for Liquid Staking Tokens (LSTs) to momentarily deviate from being pegged to Ether (ETH), as suggested by Carlos Mercado, an analyst at the Flipside Crypto research company.
Mercado told CryptoMoon:
“A broader risk is what happens when a significant percent of Ethereum is staked- the liquid staked tokens don’t have instant redemption, so in high volatility time periods they can “depeg” where the open market price differs from the (often verifiable) ETH backing.”
Ensuring a stable price for Ethereum-backed LSTs is important because the total market value of these assets currently amounts to $36.5 billion, as reported by CoinGecko.
Arbitrage bots could quickly tackle LST depegging
Even during turbulent market conditions when temporary price disparities might arise, crypto arbitrage bots are adept at swiftly rectifying such inconsistencies. These automated trading tools examine price variations among cryptocurrencies and make trades to capitalize on these discrepancies.
According to Alon Askal, Vice President of Marketing at SVV Network, these same automated arbitrage systems might swiftly resolve a LST depegging situation, as he explained to CryptoMoon.
“If there was an adversarial market movement in either direction, arbitrage bots and user redeems would quickly stabilize and bring the peg to an equilibrium, as the Shanghai upgrade enabled protocols such as Lido to exit from the beacon chain and get back the ETH.”
On April 24th, the Renzo ETH (easily-traded ETH) token momentarily deviated from its fixed price equivalence with Ether, dipping down to approximately $700 on decentralized exchanges like Uniswap. At that time, Ether itself was trading above $3,100.
The incident was triggered due to a broader market sell-off, following Renzo’s airdrop campaign that led to significant liquidations across various leveraged platforms, as per Tommy, an anonymous investor at Crypto.com Capital.
The investor explained in an April 24 X post:
“This led to liquidations on leverage protocols such as @GearboxProtocol and @MorphoLabs. Loopers (users who repeatedly use LRT as collateral to borrow ETH to create leverage) suffered loss as a result.”
Liquid staking is growing cross-chain
As a research analyst, I’ve noticed a substantial surge in the adoption of liquid staking not only within the Ethereum ecosystem but also across various leading blockchain platforms.
On the Solana network, researchers at Bytbit predict a more than five-fold rise in the adoption of liquid staking, as shared with CryptoMoon.
“In our view, Solana has a huge potential for liquid staking due to its active staking community. Based on Ethereum’s LST market statistics, Solana’s LST market could potentially grow to $18 billion.”
Due to the enhanced capital effectiveness brought about by the protocols, liquid staking has expanded to become the most significant category within DeFi, with a collective value of approximately $45 billion spread across 190 different protocols, according to DefiLlama statistics.
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2024-10-19 14:00