Hero's Image

Research Commentary: Evaluating stETH amidst the recent market turmoil


After reaching a total market capitalization of US$3 trillion in November 2021, crypto assets have gone through a significant drawdown of around 72% through mid-July this year. This strong correction, driven by a macro risk-off environment, has also been catalyzed by idiosyncrasies specific to the crypto space, such as major centralized crypto lenders becoming insolvent or going through reorganizations, as was the case of Celsius, which recently filed for bankruptcy. Some of the strategies these companies used to generate yields on their customers’ deposits relate to an asset that has made the headlines recently: stETH (staked ether), an ether synthetic offering a liquid staking product that allows users to be part of the consensus layer of Ethereum once it switches to Proof-of-Stake, while also having a derivative version of the network’s native token ready to be used on decentralized applications (DApps). Here we provide an overview of stETH, presenting the novel use case introduced by this crypto asset and discussing its role during the recent crypto shakeout.  

Why was stETH created?


Staked ether, or simply stETH, is a synthetic ether (ETH) token issued by Lido Finance, a liquid staking provider which facilitates the participation of ETH investors in Ethereum’s consensus layer as the network shifts from Proof-of-Work (PoW) to Proof-of-Stake (PoS). The full transition to PoS is expected to happen this September in the event called “The Merge.” In order to become a validator on PoS Ethereum, there are minimum computational requirements and a minimum capital investment (32 ETH—around US$52,000 at current prices[1]). Also, there is an opportunity cost when participating in the consensus on the Beacon Chain, the blockchain created for Ethereum’s PoS transition, since ETH has to stay bonded (locked) on PoS validator nodes.


Lido solves these issues by bundling ETH deposited by investors in a pooled staking service and issuing a liquid staking derivative, so that users can be part of Ethereum’s future consensus layer while having a freely tradable ETH certificate, which can be used on-chain, for instance, in decentralized finance (DeFi). Lido generates revenue by charging a 10% fee on top of staking rewards (not on the principal deposit). Since the inception of the Beacon Chain in late 2020, the TVL in Lido has quickly climbed to surpass 4.15M ETH[2].


stETH combines the value of the initial user deposit and staking rewards accrued over time, meaning the token is, from the ground-up, a yield-bearing asset. As of now, it cannot be used to redeem ETH back from Lido. This is due to withdrawals from the Beacon Chain being currently unavailable. Even after The Merge happens, this functionality will still have to wait for activation on a later hard fork, meaning the ETH synthetic can currently only be exchanged back for ETH in secondary markets, such as Curve’s stETH:ETH pool, one of the largest pools of the decentralized exchange (DEX) by both total value locked (TVL) and daily transacted volume.



Source: Data from Dune Analytics, Lido TVL, accessed July 29, 2022.

stETH and Celsius’ asset-liability mismatch


In June, we documented the story of Celsius, a major centralized crypto lender, which froze withdrawals in its platform “due to extreme market conditions” on June 12. Celsius’ business model was based on lending user funds to third parties in exchange for an annual interest rate, part of which is paid back to its customers in the form of yield on their deposited crypto assets. Celsius also used DeFi protocols to pursue other forms of generating yield. In particular, it staked a significant amount of ETH deposited by users on its platform using Lido, taking the received stETH in turn to borrow assets on DeFi protocols Aave, Compound, and Maker, mainly in the form of stablecoins. In the middle of the recent market correction, this collateral has been put under significant pressure, with the crypto community following closely the loan-to-value (LTV) ratio of Celsius loans, igniting widespread fears of the crypto lender eventually becoming insolvent.


A key issue with the stETH held by Celsius was that even if it were to repay all of their DeFi debt and get back the stETH, they would be unable to convert the entirety of that stETH back to ETH, due to the indefinite lock-up period of ETH in the Beacon Chain. Secondary markets could give them an exit, but with the amount of stETH under their possession, and the available liquidity in DEXs such as Curve at the time, a full exit would be practically infeasible, with Celsius becoming unable to honor withdrawals of real ETH on its platform. Other participants of the crypto market noticed the difficult situation Celsius was in and started a “bank run” on Curve for ETH, which imbalanced the DEX’s liquidity pool for the stETH:ETH pair, creating a discount on stETH’s value to ETH (see Figure 2). As we pointed out, that might have been a major driver for Celsius’ decision to halt customer withdrawals. Their situation worsened since then, with the company recently filing for a Chapter 11 reorganization.



Source: Data from Dune Analytics, ETH:stETH price hourly, accessed July 29, 2022.

Our take

stETH has been delivering what it promises to investors, with its main caveat so far being not allowing users to withdraw back their deposited ETH in the Beacon Chain, and the likely risks of Lido becoming too big of a staking pool in Ethereum’s future consensus layer, which raises concerns on how decentralized the network will actually be. This is a topic we follow closely and shall discuss in a future publication. However, it is worth noting that the inability to withdraw the underlying ETH is not forced by Lido, but is actually constrained by the Ethereum roadmap of upgrades. Once PoS is fully activated, and validator withdrawals become available, stETH and ETH will basically become interchangeable in value, with the likelihood of stETH even starting to consistently trade at a premium to ETH, given its yield-bearing nature. 


This asset was put in the middle of the recent market unrest by players whose risk management strategies did not account for the inherent illiquidity of the underlying asset they represent. With some of these centralized players going bankrupt, significant leverage has been flushed out of the crypto space, and we believe the market conditions in crypto have become much more healthy. Episodes such as Celsius’ show how products created with one objective can be used in a risky manner by third parties to target other goals, causing cascading effects to the asset class as a whole. We consider this as an important reminder of how risk management is a key aspect of investing in an emerging asset class, something we deeply value in our long-term investment thesis for crypto. To learn more about our views on crypto investing in a diversified portfolio, consider reading our Investment Case for Crypto


[1]  CoinMarketCap, Ethereum, accessed August 25, 2022.

[2]  On August 25, 2022.



This material expresses Hashdex Asset Management Ltd. and its subsidiaries and affiliates (“Hashdex”)'s opinion for informational purposes only and does not consider the investment objectives, financial situation or individual needs of one or a particular group of investors. We recommend consulting specialized professionals for investment decisions. Investors are advised to carefully read the prospectus or regulations before investing their funds. The information and conclusions contained in this material may be changed at any time, without prior notice. Nothing contained herein constitutes an offer, solicitation or recommendation regarding any investment management product or service. This information is not directed at or intended for distribution to or use by any person or entity located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Hashdex to any registration or licensing requirements within such jurisdiction. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Hashdex. By receiving or reviewing this material, you agree that this material is confidential intellectual property of Hashdex and that you will not directly or indirectly copy, modify, recast, publish or redistribute this material and the information therein, in whole or in part, or otherwise make any commercial use of this material without Hashdex’s prior written consent. 


Investment in any investment vehicle and cryptoassets is highly speculative and is not intended as a complete investment program. It is designed only for sophisticated persons who can bear the economic risk of the loss of their entire investment and who have limited need for liquidity in their investment. There can be no assurance that the investment vehicles will achieve its investment objective or return any capital. No guarantee or representation is made that Hashdex’s investment strategy, including, without limitation, its business and investment objectives, diversification strategies or risk monitoring goals, will be successful, and investment results may vary substantially over time. Nothing herein is intended to imply that the Hashdex s investment methodology or that investing any of the protocols or tokens listed in the Information may be considered “conservative,” “safe,” “risk free,” or “risk averse.”


Certain information contained herein (including financial information) has been obtained from published and non-published sources. Such information has not been independently verified by Hashdex, and Hashdex does not assume responsibility for the accuracy of such information. Hashdex does not provide tax, accounting or legal advice. Certain information contained herein constitutes forward-looking statements, which can be identified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue”  “believe” (or the negatives thereof) or other variations thereof. Due to various risks and uncertainties, including those discussed above, actual events or results, the ultimate business or activities of Hashdex and its investment vehicles or the actual performance of Hashdex, its investment vehicles, or digital tokens may differ materially from those reflected or contemplated in such forward-looking statements. As a result, investors should not rely on such forward- looking statements in making their investment decisions. None of the information contained herein has been filed with the U.S. Securities and Exchange Commission or any other governmental or self-regulatory authority. No governmental authority has opined on the merits of Hashdex’s investment vehicles or the adequacy of the information contained herein.


This document may contain information originated by third parties or links to third-party electronic addresses. These types of links and content are provided for your convenience and information only - it being understood that Hashdex does not maintain any control over them and makes no warranty or liability for them. Hashdex has no responsibility for any form and type of third party content or email addresses accessed through links mentioned herein.

Logo Hashdex
Les informations contenues sur ce site web sont uniquement à des fins d'information et Hashdex, ainsi que ses filiales, ne sollicitent aucune action fondée sur de telles informations. Les informations ne doivent pas être interprétées comme des conseils en matière d'investissement, ni comme une recommandation, une offre ou une sollicitation d'achat ou de vente de tout instrument financier ou produit, ou d'adoption de toute stratégie d'investissement. De plus, les informations contenues sur ce site web ne constituent pas une déclaration que les instruments financiers qui y sont décrits sont adaptés ou appropriés pour toute personne. Les performances passées ne sont pas une indication de performances futures. Ce site web peut contenir de la publicité pour des produits financiers.