The $45 billion liquid staking sector is raising concerns among investors about the long-term price stability of the cryptocurrencies associated with these protocols.
Liquid staking provides investors with more capital efficiency by providing the equivalent of an initial staking token that can be deployed across other decentralized finance (DeFi) applications.
However, Liquid Stake Token (LST) may temporarily lose its price peg to Ether (ETH), according to Carlos Mercado, data scientist at Flipside Crypto research firm.
Mercado told Cointelegraph:
“The broader risk arises when a significant portion of Ethereum is staked. Floatingly staked tokens are not immediately redeemed, so during periods of high volatility they can “depeg” the point at which the public market price diverges from the (often verifiable) price. ETH supported.”
According to CoinGecko, Ether-based LSTs have a cumulative market cap of $36.5 billion, so maintaining price stability is important.
Best liquid staking token, market capitalization. Source: CoinGecko
Arbitrage bots can handle LST depegging quickly.
Periods of high volatility may result in temporary pegs, but cryptocurrency arbitrage bots can quickly resolve these discrepancies. Arbitrage bots analyze price differences between cryptocurrency assets and execute trades to take advantage of these gaps.
relevant: Analyst says ‘L1 war’ has caused Ethereum price to fall for 7 months.
According to Alon Askal, VP of Marketing at SVV Network, these arbitrage bots can automatically correct LST depegging events. Askal told Cointelegraph:
“If there is a hostile market movement in either direction, the Shanghai upgrade will allow protocols like Lido to exit the beacon chain and reclaim ETH, allowing arbitrage bots and user buybacks to quickly stabilize and bring the peg back into balance. no see.”
On April 24, the Renzo ETH (ezETH) token lost its 1:1 peg to the price of Ether, temporarily falling as low as $700 on decentralized exchange (DEX) Uniswap, while Ether was trading above $3,100.
EZETH/WETH, 15-minute chart. Source: Tommy
According to Crypto.com Capital’s pseudonymous investor Tommy, the incident was triggered by widespread selling culminating in Renzo’s airdrop campaign that resulted in widespread liquidations across leveraged protocols.
The investor explained in an April 24 X post:
“This led to the liquidation of leveraged protocols such as @GearboxProtocol and @MorphoLabs. Loopers (users who repeatedly use LRT as collateral to borrow ETH to create leverage) suffered losses as a result.”
Liquid Stake is growing cross-chain.
Liquid staking has seen significant growth not only on Ethereum, but across other top blockchain protocols.
relevant: There is a possibility that the price of Ethereum will rise to $3,000, but some red flags remain.
Liquid staking could increase more than fivefold on Solana, according to Bytbit researchers in an interview with Cointelegraph.
“In our view, Solana has tremendous potential for liquid staking thanks to its active staking community. According to Ethereum’s LST market statistics, Solana’s LST market could potentially grow to $18 billion.”
Parent protocol category. Source: DefiLlama
Thanks to the increased capital efficiency brought about by the protocols, liquid staking has grown to become the largest protocol category in DeFi, with a total value of $45 billion across 190 protocols, according to DefiLlama data.
magazine: The proposed changes could save Ethereum from the L2 ‘roadmap to hell’.