Metrics correlation

Therefore, the first thing to check is the ETH/stETH price parity.

• 1:1 parity is meeted until May 12th.
• From May 12th since today there is a considerable gap between the two prices.

To get a deeper view the absolute error and the relative error are calulated. In words, the absolute error is the magnitude of the difference between the exact value and the approximation (ETH price - stETH price). The relative error is the absolute error divided by the magnitude of the exact value ((ETH price - stETH price)/ETH price)· 100.

• The metric of errors confirms our first approximation.There is a considerable difference between the prices of ETH and stETH reaching their highs in the second week of June.
• There seems to be a correlation between the price difference and the price fall of both assets.

In my opinion the loss of 1:1 parity between ETH and stETH causes the price of ETH to fall and not the other way around.

ETH/stETH price

Approach

Firstly, it is necessary to explain what is stETH. stETH is a token that represents the staked Ether in Lido, combining the initial deposit value with rewards. Thus, stETH is a token that allows you to earn DeFi yield rewards. By using Lido to bet their ETH on the Ethereum chain, users will receive the stETH token, which represents their ETH on the Ethereum beacon chain on a 1:1 basis. stETH uses:

• Liquidity Pools: On DEXes stETH can be associated with other assets to provide liquidity.
• Lending: Users can borrow assets using stETH as collateral, allowing them to participate in different DeFi plans without having to sell their underlying ETH.
• Strategies/Aggregators: Aggregators can use stETH into their yield farming practices as an additional yield layer on top of their current yield farming strategies.

It all started when Alameda Capital, one of the largest stETH holders, sold all of its stakes in the token. The sell off was amounted to a staggering $1.5 billion.

Moreover, another reason of the depeg, is because users deploy leverage farming strategy. Specifically, the steps of this strategy are as follows:

• Mortgage stETH on Aave, borrow on ETH.
• Hold the borrowed amount of ETH, stake in Lido Finance, receive stETH.
• Take the amount of stETH received, mortgage it to Aave and repeat the ETH loan round.

This strategy helps users leverage staking interest from Lido, helping to increase the yield higher than the initial staking of 1 amount of ETH. However, this is also equivalent to shorting ETH against the collateral of stETH.

Reasons to the Depeg

ETH Gas price

Next metric to take into consideration is ETH gas price in USD vs the relative error between ETH and stETH price.

• I seems to exist a correlation between Gas price and ETH/stETH fluctuation. When the relative error gets bigger the Gas price is reduced.

Amount staked/unstaked of stETH

Now let's analyse the amount in and the amount of stETH in order to establish if the users are swaping stETH for other assets or the other way and try to establish some correlation with the ETH:stETH price desviation.

In this chart we can see some interesting observations:

• We can se that 2-3 days before the ETH:stETH price depegged some important liquidations happened. This probably helped the price fluctuation.
• On May 12th we can see a huge peak of liquidations which made the ETH:stETH relative error to reach it's highest value, spreading panic around the market.
• If we analyse from the start of May when the price started to depeg, there are always more stETH liquidations than stETH amount infor staking.

Curve stETH pool

stETH pool is a liquidity pool that contains stETH and ETH (wETH, to be specific). Users can use these pools to swap their ETH for stETH and vice versa. Alternatively, stETH holders can provide liquidity to Curve and receiving trading fees in CRV token.

• The chart below represents the volume of stETH and wETH.
• During the first 15 days of May (stETH:ETH depeg started) we can see the maximum value for both tokens volume.
• Since stETH:ETH depeg the volume in stETH/ETH pool is way bigger than during the rest of 2022.

I aggregate the total swap activity of stETH to ETH (wETH) and wETH to stETH on the Curve stETH pool. The daily swap ratio of stETH to wETH and wETH to stETH was calculated as stETH demand ratio. If the ratio is 1, it means that there was an equal amount of stETH to wETH swap, vice versa. If the ratio is greater than one, it means that there's a greater demand for stETH

• The chart below represents the volume of swaps between the two tokens of the poo.
• During the first 15 days of May (stETH:ETH depeg started) the volume started to increase very rapidly.
• The demand ratio in this market volatility times does not take really higher values compared to othrt times during 2022.

Thanks for reading