In recent weeks, concerns have mounted over the growing discount of stETH against ETH—particularly amid turmoil surrounding major crypto lenders like Celsius. With stETH trading at around 0.937 ETH on Curve, questions arise: What exactly is stETH? Why is it trading below parity? And could it enter a death spiral similar to UST?
Let’s explore the mechanics behind stETH, its pricing dynamics, liquidity challenges, and inherent risks—offering clarity for investors navigating this complex landscape.
What Is stETH and Lido?
stETH (liquid staked ETH) is a token issued by Lido, a decentralized, non-custodial Ethereum staking protocol. When users stake ETH through Lido to participate in Ethereum’s Proof-of-Stake (PoS) consensus, they receive stETH in return—representing both their staked balance and accrued rewards.
Unlike direct staking—which requires 32 ETH and technical expertise—Lido allows users to stake any amount of ETH with minimal friction. The protocol distributes deposits across multiple node operators, enhancing decentralization and security. Over time, stETH accrues value as staking rewards are automatically reinvested and reflected in the token's exchange rate.
Importantly, post-Ethereum merge, stETH will be redeemable 1:1 for ETH. This redemption guarantee forms the core of stETH’s long-term value proposition.
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How Does Lido Work?
Lido operates through a modular architecture involving three key participants:
- Users (Depositors): Stake ETH and receive stETH.
- Node Operators: Run validator nodes that perform actual staking on-chain.
- DAO Governance: Manages protocol upgrades, fee structures, and operator selection.
When you deposit ETH into Lido, it’s routed via a smart contract to pre-approved node operators who submit it to the Ethereum beacon chain. In return, you receive stETH tokens that grow in quantity over time due to compounded staking rewards.
Rewards are distributed through an oracle system that updates the stETH exchange rate daily. A portion of fees goes to node operators and the Lido DAO treasury, ensuring sustainable operation.
This design solves critical issues faced by solo stakers: high entry barriers, lack of liquidity, and technical complexity.
Why Is stETH Trading at a Discount?
As of June 2025, stETH trades at a persistent discount to ETH—around 6–7%. Several interrelated factors explain this divergence:
1. Limited Liquidity
Despite being the largest liquid staking solution—with over 4 million ETH staked (~32% of total staked ETH)—stETH suffers from shallow trading depth.
The primary trading venue is Curve Finance’s stETH-ETH pool, which historically provided deep liquidity. However, between May and June 2025, total liquidity in the pool dropped from $1.7B to $670M. More critically, the asset ratio skewed heavily toward stETH (up to 80:20), meaning only about 120,000 ETH remains available for swaps—far below demand.
Compare that to Celsius alone reportedly holding over 450,000 stETH. Clearly, market infrastructure cannot absorb large sell-offs without significant slippage.
Centralized exchanges offer little relief. FTX remains the sole major CEX listing stETH, with negligible volume compared to decentralized markets.
2. Forced Selling Amid Leverage Unwinding
During bull markets, institutions used leveraged yield strategies: borrowing ETH against stETH collateral on platforms like Aave, then re-staking those funds to mint more stETH—effectively compounding returns.
But when ETH prices fell sharply in mid-2025, these positions faced margin calls. To avoid liquidation, firms like Celsius, Three Arrows Capital, Amber Group, and Alameda Research began offloading stETH en masse.
Chain data shows a dramatic drop in “smart money” holdings—from 160,000 stETH held by top addresses in May to just 27,800 by late June. This fire sale created downward pressure, exacerbating the discount.
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3. Uncertainty Around Ethereum’s Merge Timeline
stETH functions like a forward contract on ETH—its full liquidity depends on Ethereum enabling withdrawals post-merge.
Any perceived delay in the network upgrade increases uncertainty. Investors demand a higher risk premium for holding an illiquid asset with uncertain unlock timing—leading to further discounting.
Though core developers reaffirmed the Q3 2025 target for full withdrawal functionality, past delays have made markets cautious.
4. Smart Contract and Protocol Risk
Lido relies on multiple smart contracts: deposit management, oracle reporting, node operator registry, and reward distribution. While audited and battle-tested, no system is immune to bugs or exploits.
Additionally, concentration risk exists—though Lido uses diverse node operators, governance centralization (e.g., reliance on a few large node pools) introduces subtle vulnerabilities.
These risks—however small—are priced into the market via the stETH discount.
Will stETH Enter a Death Spiral?
Unlikely. Unlike algorithmic stablecoins such as UST—which collapsed due to flawed incentive design and insufficient collateral—stETH has hard underlying value.
Each stETH token represents a verifiable claim on real ETH locked in the beacon chain. Post-merge, users can burn stETH to withdraw their principal plus rewards at a guaranteed 1:1 rate.
This fundamental backing ensures that while short-term price volatility may persist, a true death spiral is structurally impossible unless Ethereum itself fails.
Moreover, as the discount widens, arbitrage opportunities emerge:
- Buyers can purchase discounted stETH and hold until withdrawal activation.
- Expected annual yield from staking (~4–6%) enhances returns during the wait.
- Eventually, supply-demand imbalances correct themselves as leverage unwinds and panic subsides.
Historically, similar dislocations (e.g., sBTC vs BTC) resolved once market conditions stabilized.
Frequently Asked Questions
Q: Can stETH go to zero?
A: No. As long as Ethereum functions and withdrawals are enabled, stETH retains intrinsic value backed by real staked ETH.
Q: Is Lido centralized?
A: While Lido uses a DAO for governance, some centralization exists in node operator selection. However, ongoing decentralization efforts aim to reduce reliance on any single entity.
Q: How do I redeem stETH for ETH?
A: After Ethereum enables withdrawals (expected Q3 2025), you’ll be able to swap stETH 1:1 via Lido’s official interface or supported DeFi protocols.
Q: Should I buy discounted stETH?
A: For long-term ETH holders comfortable with temporary illiquidity, buying at a discount offers enhanced yield potential. But assess your risk tolerance—short-term volatility may continue.
Q: Are there alternatives to Lido?
A: Yes—projects like Rocket Pool and Coinbase’s liquid staking offer competing models with varying degrees of decentralization and fee structures.
Q: What happens if Ethereum merge is delayed again?
A: The discount may widen temporarily, but unless delays become indefinite, the fundamental value remains intact.
Final Thoughts
The current stETH discount reflects a confluence of macro stress, forced deleveraging, and structural liquidity constraints—not a fundamental flaw in its design.
While short-term price action may remain choppy, the asset’s hard peg to future ETH withdrawals provides a strong floor. As markets stabilize and Ethereum completes its transition, confidence in liquid staking solutions like Lido is likely to rebound.
For informed investors, periods of fear often reveal asymmetric opportunities—especially when backed by robust underlying technology.
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