The cryptocurrency market is collapsing, and companies that took excessive risks are now facing the consequences.
Celsius Network, one of the largest DeFi lending platforms managing approximately $12 billion in assets, recently announced the suspension of all withdrawals, sparking widespread panic about its potential insolvency.
How StETH Triggered a Multi-Billion Dollar Liquidity Crisis
The Rise and Risks of Lido's stETH
Later this year, Ethereum will complete "The Merge," transitioning from Proof-of-Work (PoW) to Proof-of-Stake (PoS). Before the merge:
- Investors can stake ETH to secure the new PoS chain and earn yields (~4% APY)
- However, this comes with liquidity limitations—staked ETH cannot be redeemed until after the transition
- Direct staking requires a 32 ETH minimum, creating high barriers for small investors
Enter Lido Finance: a decentralized staking platform offering:
- stETH tokens (1:1 ETH derivatives without the 32 ETH requirement)
- Comparable yields to direct PoS staking
- Full redeemability post-merge
- Additional functionality like lending, staking, and trading
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Today, Lido holds over 4 million staked ETH (32% of all staked ETH), making it the largest single staking service. To support stETH demand, Curve introduced an stETH-ETH liquidity pool for efficient trading and conversions.
The Perfect Storm: Terra's Collapse and Liquidity Imbalance
The crisis began when:
- stETH started trading at a 5% discount to ETH in May
- The discount reappeared more severely last week
- Terra's collapse caused panic selling of stETH
- Investors rushed to convert stETH to ETH, draining ETH from Curve's pool
The Curve pool is now severely imbalanced:
- 80% stETH
- 20% ETH
Unlike Terra's UST, stETH isn't pegged—it simply represents staked ETH. The discount reflects liquidity issues, not fundamental flaws.
Celsius' Liquidity Nightmare
Public wallet data suggests Celsius holds ~$475 million in stETH. Key problems:
Curve Liquidity Crunch: Only ~116,000 ETH ($130M) available—selling large amounts would crash stETH's value
- Selling 100K stETH would drop the exchange rate to 0.84
CEX Limitations: FTX has minimal stETH liquidity (~$50K at 2% depth)
- A $100K sell order incurs 8.5% in losses (3.5% slippage + 5% discount)
No Viable Exit: Celsius can't:
- Wait for the merge (urgent liquidity needs)
- Sell stETH on DEXs/CEXs (insufficient liquidity)
Survival Strategies: OTC Deals and FTX's Role
Facing insolvency, institutions appear to be:
- Engaging in off-chain OTC deals with stETH as collateral
- Moving stETH to FTX (now the largest stETH holder outside smart contracts)
Recent chain data shows:
- $150M+ stETH destroyed from Curve by Amber Group
- Massive stETH/ETH deposits to FTX
- Unusual OI spikes in FTX's ETH futures during price drops
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FAQ: Understanding the stETH Crisis
Q: Is stETH fundamentally broken?
A: No—it's a liquidity crisis, not a design flaw. stETH remains redeemable 1:1 post-merge.
Q: Can Celsius recover?
A: Possible via OTC deals, but trust in their risk management is severely damaged.
Q: How does this affect Ethereum?
A: Short-term pain, but highlights DeFi's need for robust liquidity solutions.
Q: What's stETH's current status?
A: Trading at ~5% discount; Curve pool remains highly imbalanced.
Q: Are other platforms at risk?
A: Any protocol overexposed to stETH or poor liquidity management faces similar stresses.
Conclusion: A Watershed Moment for DeFi
This crisis exposes critical vulnerabilities in DeFi's liquidity infrastructure. While Celsius may survive through extraordinary measures, the event will likely accelerate:
- Better liquidity risk assessment
- Improved derivatives design
- More robust institutional safeguards
The path forward requires learning from these liquidity pitfalls while maintaining Ethereum's innovative potential.