What is Staked Ether?
A cryptocurrency token known as staked ether (stETH) stands for one unit of ether (ETH) that has been “staked” or deposited and locked up in favor of Ethereum’s upgraded network, known as the beacon chain. In that stETH holders should be able to redeem staked ether tokens for an equal amount of ether tokens after a waiting time, staked ether operates much like an IOU. In this situation, the waiting time will continue until the adoption of Ethereum 2.0, the new network standard for the cryptocurrency.
Staked ether came into focus in spring 2022 when the cryptocurrency market went through major turmoil, with many of the top tokens losing a significant amount of their value. The fact that stETH’s price dropped below that of ether even though the two are meant to trade at the same value is one factor contributing to staked ether’s involvement in this mess. Concerns for a market collapse and an ongoing crypto liquidity crisis have arisen as a result of this.
Lido Finance’s stETH tokens were worth $1,090.67 as of June 23, 2022, compared to $1,143.39 for ETH tokens, or almost 95.3 percent of ether’s value.
Knowledge of Staked Ether
Understanding the idea of “staking” cryptocurrency tokens is necessary before understanding staked ether. To enhance the security of the cryptocurrency network and to verify blocks in the network blockchain, staking calls on token holders to lock up tokens over a period of time. The proof of stake procedure is how these investors are compensated for engaging in this technique (PoS).
Using a proof-of-stake technique, the Ethereum 2.0 network update will be implemented. A minimum of 32 ETH may be staked by current Ether owners in exchange for a lucrative annual percentage rate payment. However, these tokens cannot be redeemed until a time after the upgrade and must be staked for a period of months or even years.
It is unclear when the update will be finished, and it has already been postponed.
The majority of ether investors do not have the 32 ETH minimum necessary to stake for the Ethereum 2.0 upgrade. However, other sites like Lido Finance have allowed people to invest lesser amounts of ETH. Users of Lido are now able to stake any amount of ether in return for the stETH derivative token. In conventional banking, it is comparable to a loan or insurance product. Despite the fact that their ETH tokens are being staked, individuals may still trade and lend their cryptocurrency holdings thanks to StETH tokens.
The Decoupling of Staked Ether From Ether
As previously indicated, the price of staked ether suddenly become independent of the price of ETH. In comparison to ETH, StETH is presently selling at a discount. Deposits of stETH of hundreds of millions of dollars have been accumulated on Lido Finance and other like sites. If the value disparity grows, holders of stETH may feel compelled to sell their derivative tokens. However, according to sources, the liquidity pool that permits transfers between stETH and ETH is seriously out of balance. As a result, there isn’t enough ETH to cover all possible stETH withdrawals.
Furthermore, the recurring problems with staked ether raise worries with Ethereum’s security in general. Lido controls a substantial portion of the soon-to-be-upgraded network since it stakes around one-third of all ether to the Ethereum 2.0 beacon chain.
The possible repercussions of this are unclear, but they are comparable to the 51 percent assault in proof-of-work networks, when a group of miners gains control of the majority of the network’s computational power before seizing control of transactions.
The decoupling of stETH included Celsius, another cryptocurrency lender. As soon as the decoupling started, Celsius stopped account withdrawals. With deposits totaling more than $400 million in stETH, Celsius may be forced to liquidate some of its holdings, which would further depress the price of stETH.
Additional Concerns Regarding Staked Ether
Crypto investors have connected the decoupling of the prices of stETH and ETH to the recent value breakdown of the stablecoin TerraUSD (UST) and the US dollar. Following a bank run earlier in 2022, TerraUSD, a so-called algorithmic stablecoin intended to be tethered to the US dollar, crashed.
Analysts have, however, asserted that the stETH/ETH decoupling is distinct. Since StETH is not a stablecoin, it is not necessary for it to trade at a 1:1 ratio to ETH in order for it to work. Because withdrawals from staking have not yet been made possible on the Ethereum network, the possibility of a bank run happening right away is also reduced.
What Is Ethereum?
Blockchain technology underpins the decentralized, international software platform known as Ethereum. Ether, or ETH, the network’s native coin, is well-known. Anyone may use Ethereum to develop any kind of secure digital technology. The fundamental component of decentralized apps, smart contracts, are natively supported by the Ethereum network.
The Proof-of-Stake (PoS) procedure: How does it operate?
Proof of stake (PoS) is a consensus algorithm used by cryptocurrencies to process transactions and add new blocks to a blockchain. Proof-of-stake modifies the method that blocks are validated using the machines of currency owners, in contrast to a proof-of-work (PoW) scheme. In exchange for the opportunity to validate blocks, the owners submit their currencies as collateral. Owners of staked coins are known as “validators.”
What Consequences Do Ether and Staked Ether’s Decoupling Have?
Concerns concerning the integrity of the Ethereum network, liquidity for holders of ether, and the general state of the cryptocurrency market have been raised as a result of the decoupling. The Ethereum network has not made staking withdrawals possible, thus the possibility of a bank run right away is minimized.