Thread by @sushantreddycom

Past 2 weeks have seen a massive deleveraging in #Defi. Two giants @CurveFinance and @LidoFinance have just lost >50% TVL in just one week.

In this 🧵, I look at what is happening to @LidoFinance and its implications post $UST collapse

From ATH TVL of ~$21 billion in April, LIDO TVL has nosedived to ~$8 billion by May 14. ~11 billion drop in TVL ($19 billion to $8 billion) happened just in the week after $UST debacle.

LIDO is a liquidity staking platform that locks $eth for $steth (can be used as collateral/ asset pooling & earns staking rewards)

LIDO saw a gradual increase of TVL in anticipation of 'The Merge' for Ethereum 2.0. 4.1 mil $eth worth $8.2 billion staked.

While above chart shows a constant increase in deposited $eth, LIDO lost $10 billion in TVL due to its exposure to Terra ecosystem.

Apart from $steth, LIDO also issued $stluna by allowing Terra investors to stake LUNA. LIDO had a TVL of ~9b stLUNA that got wiped out.

Investors converted $stluna to $bluna for lending on @anchor_protocol. $stluna was also used in @mars_protocol and LP pools of @astroport_fi etc. With the implosion of #luna, LIDO TVL collapsed overnight

In the aftermath, even $steth liquidity staking (core value prop of LIDO) has taken a hit.

Share of Lido $eth deposits have fallen from 90% to 15% in last 7 days.

This is also compounded by the depeg of $steth-$eth on @CurveFinance. Investors are dumping $steth into the pool in exchange for $eth and this has resulted in a de-peg for $steth.
Investors are opting for a liquid $eth over locked $steth

LIDO is losing market share in its core $eth liquid staking business.

Rocket pool has seen a massive uptick in $eth deposits compared to LIDO - whether this loss of trust is temporary or permanent, time will tell.

LIDO seems to be desperately trying to retain the peg by providing additional incentives to $steth-$eth curve pool.

In the current 'fear driven' market, incentives don't seem to have a desired effect. Peg hasn't recovered even after a week.

The $steth:$eth = 1 is used by a lot of yield farmers to run a 'loop borrowing' strategy - stake $eth to get $steth. Use $steth as collateral to get more $eth and keep repeating in loop..
This strategy collapses when $steth < $eth. If depeg goes < 0.95, all hell will break loose

To summarize, LIDO is facing:
1. Loss of TVL due to significant exposure to Terra
2. Fear of protocol risk is making $eth > $steth
3. LIDO's new incentives may not work in current market
4. LIDO is losing confidence viz-a-viz competitors
5. Potential bank run on $steth-$eth

All the above make me feel that #defi is under a lot of pressure.

Greed has led investors to overcook yields and make the eco-system fragile.

Everything hinges on $BTC - if $BTC collapses, there are a lot of unseen second-order effects at play. $LIDO is one of them