In recent days, the growing decoupling between stETH and ETH has become one of the most discussed topics in the crypto space. At one point, ETH prices dropped by nearly 12%, while panic spread across markets as liquidity concerns around stETH intensified. Is this the beginning of a "death spiral" for liquid staking, or is the market overreacting? Let’s explore the mechanics behind stETH, the current crisis, and what it means for the future of Ethereum’s transition to Proof-of-Stake.
Understanding Liquid Staking and the Role of stETH
As Ethereum prepares for the long-anticipated Merge to Proof-of-Stake (PoS), the mining landscape is shifting. Unlike traditional Proof-of-Work mining, PoS requires validators to stake at least 32 ETH to participate directly in consensus. This high barrier to entry makes it difficult for average users to join due to capital and technical constraints.
Enter liquid staking—a solution that allows users to stake smaller amounts of ETH through third-party platforms. These platforms pool user funds, stake them collectively on the Beacon Chain, and issue liquid staking tokens as proof of ownership. One of the most prominent tokens in this space is stETH (staked ETH), issued by Lido Finance.
When users deposit ETH into Lido, they receive an equivalent amount of stETH in return. This token represents their staked position and accrues yield over time. Once the full withdrawal functionality is enabled post-Merge, users will be able to redeem their stETH for ETH plus rewards.
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Currently, over 420,000 stETH tokens are in circulation, held across 78,544 unique addresses, with more than 290,000 transactions recorded. The system was designed to maintain a 1:1 peg with ETH under normal conditions—assuming confidence in Lido and the eventual redemption mechanism remains intact.
Recent Market Movements: The Unraveling Begins
On June 10, stETH transaction volume surged by 68%, reaching 3,573 transactions. This spike signaled increasing activity from large holders—often referred to as "whales"—and institutional players exiting their positions. Notably, three addresses dominate stETH holdings:
- Aave interest-bearing stETH: 34.06%
- 0xdc2…022: 12.11%
- Wrapped liquid staked Ether 2.0: 11.16%
A key trigger for market unease came from an address tagged by Nansen as belonging to Alameda Research. Starting June 8, this wallet began moving over 75,000 stETH through FTX, gradually selling off its holdings and amplifying downward pressure on stETH’s price.
But why did confidence begin to erode in the first place?
Why Did stETH Lose Its Peg?
In theory, 1 stETH should always be redeemable for 1 ETH after the Merge. Additionally, because stETH earns staking rewards (currently around 4% APY), its future value should actually exceed that of ETH. So why is it trading at a discount?
The answer lies in liquidity and trust.
Lido maintains the peg by ensuring stETH is widely usable across DeFi platforms:
- Listed on major DEXs like Uniswap and Curve
- Accepted as collateral on MakerDAO and AAVE
- Integrated into CeFi platforms like FTX
These integrations create demand and allow seamless swapping between stETH and ETH—keeping prices aligned.
However, this equilibrium depends on two assumptions:
- Users believe they can eventually redeem stETH for ETH.
- There’s sufficient liquidity to support swaps during high demand.
Both assumptions are now under stress.
The Celsius Crisis: A Catalyst for Panic
The breaking point came with news surrounding Celsius Network, a major centralized lending platform. It was revealed that Celsius had deposited over 40,000 ETH with Stakehound, another staking provider, only for Stakehound to lose access to private keys—rendering those funds irretrievable.
While Celsius wasn’t directly using Lido for those funds, the incident triggered broader concerns about counterparty risk in staking services.
More critically, analysis showed that Celsius held only 27% of user deposits in liquid ETH. The remaining:
- 44% was staked via Lido (held as stETH)
- 29% was self-staked on the Beacon Chain
This means if users demanded mass withdrawals, Celsius couldn't fulfill most requests immediately. To cover redemptions, it would need to sell stETH on secondary markets like Curve, where the stETH/ETH pool provides liquidity.
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With trust in Celsius collapsing, users rushed to withdraw—and Celsius likely began selling stETH to raise ETH. This sudden sell pressure caused stETH to trade below parity on Curve.
Then came another blow: a large institutional holder started dumping significant amounts of stETH on Curve, worsening the imbalance and deepening the discount.
The Domino Effect: DeFi Leverage Loops at Risk
The real danger emerged within DeFi’s leveraged yield strategies. On platforms like Aave, over 1.4 million stETH is used as collateral in lending pools.
One popular strategy involves:
- Staking ETH on Lido → receiving stETH
- Depositing stETH into Aave → borrowing ETH
- Repeating the cycle to amplify returns (~20% APY)
This loop relies entirely on the assumption that stETH ≈ ETH in value.
But when the peg breaks:
- The value of collateral (stETH) drops
- Loans become undercollateralized
- Liquidations begin en masse
Each liquidation forces more stETH onto the market, driving prices lower—a classic death spiral.
Currently, Aave’s stETH market shows $2+ billion in deposits but 0% utilization and 0% borrow APY, suggesting these are largely circular leveraged positions waiting to unwind.
FAQ: Addressing Key Concerns
Q: Can I still redeem stETH for ETH today?
No. Full withdrawals aren’t enabled yet on Ethereum. Redemption will only be possible after the Merge activates withdrawal functionality—expected within months post-upgrade.
Q: Is Lido insolvent or at risk of collapse?
There’s no evidence Lido itself is insolvent. It continues to operate normally, and its smart contracts remain secure. The issue is market perception and temporary liquidity crunch—not protocol failure.
Q: Will stETH ever recover its peg?
Historically, minor peg deviations corrected once panic subsided. If Ethereum successfully completes the Merge and enables withdrawals, confidence should return and the peg stabilize.
Q: What happens if the death spiral continues?
Extreme scenarios could see cascading liquidations across DeFi. However, protocols may activate emergency measures (e.g., pause borrowing, adjust collateral factors) to limit damage.
Q: Should I sell my stETH now?
That depends on your risk tolerance. Holding stETH means betting on Ethereum’s successful transition. Selling locks in losses but removes exposure to further downside.
Q: How does this affect Ethereum’s long-term outlook?
Short-term volatility doesn’t undermine Ethereum’s fundamentals. The Merge remains a critical upgrade that will enhance scalability and reduce energy use.
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Conclusion: Panic vs. Reality
While the current situation is serious, labeling it a full-blown “death spiral” may be premature. The decoupling reflects short-term liquidity stress and loss of confidence—particularly due to third-party failures like Celsius—not a fundamental flaw in Lido or stETH.
The key variables moving forward are:
- Speed of Ethereum’s withdrawal rollout
- Market sentiment during the Merge transition
- Ability of DeFi protocols to absorb liquidation shocks
If Ethereum delivers on its promises, stETH should regain its footing. But this episode serves as a stark reminder: even decentralized systems are vulnerable when trust falters.
Core Keywords: stETH, Lido, Ethereum Merge, liquid staking, DeFi liquidity, stETH decoupling, Proof-of-Stake, Celsius crisis