Thread by @SmallCapScience

Researching several topics today for our new episode of @MarketCapping and one is sticking out to me as a major concern.

$stETH / $ETH peg is in rough shape and running out of liquidity fast.

Compiling my thoughts to get more eyes on this... 🧵

@MarketCapping $stETH is a staked version of $ETH from @LidoFinance that is meant to secure $ETH post-merge.

$stETH is fully backed 1:1 by $ETH it's just very illiquid until the merge in a few months. This has never been an issue because there was a Curve.Fi pool for liquidity

@MarketCapping @LidoFinance The Curve.Fi pool has become very heavily imbalanced with nearly 75% of the pool now made up of $stETH. The highest the imbalance has ever been...

This results in $stETH being about 3% under the peg and sliding further away.

@MarketCapping @LidoFinance The pace of the de-pegging is determined by the imbalance of assets in the LP and A Factor.

Not familiar with A Factor? Here is a quick post by @Tetranode explaining how it works. The $stETH pool is at critical levels and the depeg will likely accelerate.

@MarketCapping @LidoFinance @Tetranode With $stETH being backed 1:1 and the merge being only months away it seems like a no-brainer to buy the arbitrage opportunity and hold the $stETH.

This is much different than $UST which didn't have a backing so why are people exiting?

@MarketCapping @LidoFinance @Tetranode The canary in the coalmine for me was @AlamedaResearch exiting their position yesterday. Unloading nearly 50k $stETH over a matter of hours and suffering massive slippage to exit...

Alameda is always early to big moves...

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch In fact, they were one of seven investors that are massive holders of Lido (stETH) and could make a large bank run happen.

When looking into a few other large $stETH holders is when all the reg flags start popping up. Starting with @CelsiusNetwork...

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork They have a massive position including nearly 450k $stETH worth $1.5 billion. Using Aave they have deposited $stETH for collateral and have accumulated about $1.2B in debt.

This still shouldn't be an issue... yet.

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork The issue is that @CelsiusNetwork is quickly running out of liquid funds to pay back their investors who are redeeming positions.

Billions in illiquid positions that they are taking massive loans against to payout their customer redemptions.

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork How is a multi-billion dollar fund struggling so bad for liquidity becomes the next question?

@CelsiusNetwork managed to lose insane amounts of money in hacks throughout the past year. Every thread you pull on here, things get worse...

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork It started with a $70M loss in a StakeHound Exploit...

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork They lost $50M in the @BadgerDAO front-end exploit.

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO On top of these, $500M of client deposits were in the $LUNA / $UST Ponzi that recently collapsed. It blows my mind how reckless they have been with customer funds.

These are only exploits that have become public knowledge, others could have also occured.

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO Investors attempting to redeem their positions at a rate of around 50k $ETH per week means @CelsiusNetwork has two options.

1 . Sell their $stETH for $ETH and then stable coin in order to become more liquid.
2. Use the $stETH as collateral and take out loans to repay customers

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO Diving into Option #1 of selling $stETH in order to become more liquid.

Their position is around 450k $stETH but looking into the Curve steth/eth LP-only about 242k $ETH of liquidity remains. Every sell, the pool gets further away from being pegged 1:1 which is a loss for them.

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO There is also about $5M of $stETH liquidity on Uniswap and I've been unable to track the size of CEX liquidity. CEX liquidity, UniSwap, Curve, and other sources can't handle them selling their whole position. If CEX's it, they would be selling more volume there instead of onchain

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO $stETH is only paired with $ETH outside a small portion paired with $USDC on FTX. This means $stETH is sold to $ETH which is dumped for stables.

They have massive loans against $stETH and these billions in sell pressure are making the collateralization rates less healthy.

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO This leads us to option #2 which is taking loans against their $stETH positions and borrowing stables.

@CelsiusNetwork already has over $1B in debt and @AaveAave has nearly $2.5B of $stETH being used as collateral. Not good.

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO @AaveAave Let's say $stETH depegs heavily or market conditions get worse.

Celsius can get liquidated. Borrowing is getting more expensive, their collateral is losing value due to market conditions, and selling below peg hurts and liquidity is drying up. Negative feedback cycle. Yikes🤢

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO @AaveAave One thing to consider is that I'm not sure how Aave liquidations would work with stETH being an illiquid asset.

Are they on the hook for the assets or forced to be illiquid for months while being exposed to a falling $ETH price? Would love outside input here...

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO @AaveAave It is very likely that @CelsiusNetwork would freeze redemptions before they would get liquidated.

They only have a few weeks of funds left and are taking heavy losses due to the peg, borrow/lending fees, and also have the risk of the merge being delayed. When do they freeze?

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO @AaveAave Let's not forget, they aren't the only other whale in this scenario. As other whales smell blood, they can force the hand of Celsius and cause them to liquidate other positions while shorting futures markets. Uh oh, so Alameda dumping 50k stETH and moving heavily into stables..

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO @AaveAave There are also other whales such as @swissborg that have around 80k $stETH ($145M) of customer funds as part of their asset management platform.

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO @AaveAave @swissborg Looking at the @swissborg wallet, they have $27M in the $stETH Curve LP and another 52k stETH available ($91M). If they pull their curve position and sell, Celsius becomes trapped nearly instantly on their positions.

The whales are exiting... who will get out first?

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO @AaveAave @swissborg Taking a look at transactions from today, there have been some massive exits including this TX for 2.4k stETH ($4.2M).

Looking at the wallet on zapper it's easy to tell this is a funnel wallet. A quick search on twitter and you find..

etherscan.io/tx/0x7580ba317…

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO @AaveAave @swissborg It's Celsius withdraw/deposit volume on FTX and they have offloaded more than 5k stETH today alone. Uh oh.

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO @AaveAave @swissborg Looking at the Celsius wallet from earlier. I'd start to look at other positions that Celsius has they will need to liquidate as stETH continues to become less and less liquid.

$7M - $LINK
$400M+ - $wBTC

It's coming...

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO @AaveAave @swissborg Plenty of retail is rushing into arb the trade on Aave with leverage which can get very ugly if the price of ETH crashes.

Everyone will need collateral to cover their leverage and sell off their other positions.

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO @AaveAave @swissborg If I were a VC or market maker, I would have a massive target on Celsius's back.

1. Liquidate them and short
2. Break the $stETH peg. Bank run starts, $ETH price crashes, and then buy $stETH at a massive discount before the merge.

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO @AaveAave @swissborg I've also only been able to research a few of the major stETH holders, there could be other risks with the other whales.

This seems inevitable. My goal is to get some outside opinions to see if there is an angle I may have missed.

@MarketCapping @LidoFinance @Tetranode @AlamedaResearch @CelsiusNetwork @BadgerDAO @AaveAave @swissborg Disclaimer -

None of this is financial advice and please do your own research. I'm compiling information and sharing findings but am in no way an expert on $stETH, Celsius, Lido, or the other participants involved.

Let me know your thought! GL 📉