Understanding Fusion and Ethereum 2.0: What is Staked Ether (stETH), and why is it important?

What is Staked Ether?

Staked Ether (stETH) is a token of crypto-currency representing a unit of ether (ETH) that has been ‘staked’, i.e. deposited and locked, to support Ethereum’s enhanced network called the Beacon Chain. Staked Ether works much like an IOU, in that holders of staked Ether should be able to exchange their Ether Tokens for an equivalent number of Ether Tokens after a waiting period. In this case, the waiting period will last until Ethereum’s new network standard, Ethereum 2.0, is adopted.

In the spring of 2022, plundered ether became a focal point when the cryptocurrency market experienced significant turmoil, with several major tokens losing significant chunks of value. One of the reasons for the role of looted ether in this chaos is that the price of stETH has fallen below that of ether, when the two are supposed to trade at the same value. This may interest you: Ethereum Price Prediction: Here’s How ETH Will Return to a $3000 Price Soon. This raised concerns of a market meltdown and an ongoing crypto liquidity crisis. As of June 23, 2022, Lido Finance’s stETH tokens were trading at $1,090.67 compared to $1,143.39 for ETH tokens, or approximately 95.3% of the value of ether.

Understanding Staked Ether

To understand staked ether, one must first understand the concept of staking cryptocurrency tokens. Staking requires cryptocurrency holders to lock up their tokens for a period of time to support the security of the cryptocurrency network and to validate the network’s blockchain blocks. On the same subject : Crypto.com price flips after market collapse. These investors are rewarded for this practice through a process known as proof-of-stake (PoS).

The Ethereum 2.0 network upgrade will use a proof-of-stake mechanism. Current Ether holders can stake a minimum of 32 ETH in exchange for a competitive annual reward rate. However, these tokens must be staked for several months or even years, and can only be redeemed after a post-upgrade period. The upgrade has already been delayed, and it’s unclear when it will be complete.

The 32 ETH minimum required to upgrade from Ethereum 2.0 is well beyond most ether investors’ holdings. Nevertheless, external platforms such as Lido Finance allowed users to stake smaller amounts of ETH. Lido allowed users to stake any amount of ether in exchange for the derivative token stETH. The latter is similar to a loan or insurance product in traditional banking. stETH tokens allow users to continue trading and lending their cryptocurrency holdings, even if their ETH tokens are staked.

Ether decoupling by piles

As mentioned, the value of looted Ether recently decoupled from the value of ETH. StETH is currently trading at a discount to ETH. Lido Finance and other similar platforms have amassed hundreds of millions of dollars in stETH deposits. On the same subject : Cardano at its most undervalued price since 2020. Users holding stETH may feel increasing pressure to dump their derivative tokens in case the value gap widens. However, the liquidity pool allowing transfer between stETH and ETH is significantly out of balance, according to reports. This means that there is not enough ETH to meet every potential stETH withdrawal.

Additionally, the current issues with staked ether raise concerns about the security of Ethereum more generally. Lido accounts for about a third of all ether staked in the Ethereum 2.0 beacon chain, meaning Lido holds significant power over the soon-to-be-upgraded network. The potential implications of this are not entirely clear, but they are reminiscent of a similar concern in proof-of-work networks, called the 51% attack, in which a group of miners control the majority of the network’s computing power and then take over. transaction control.

Another cryptocurrency lender, Celsius, also played a role in decoupling stETH. Celsius stopped account withdrawals when the decoupling began. With over $400 million in stETH deposits, Celsius may have to try to sell its stETH, which would put further downward pressure on the value of stETH.

Wider Concerns About Staked Ether

As stETH and ETH saw their prices diverge, cryptocurrency investors compared this decoupling to the recent break in values ​​between terraUSD (UST), a stablecoin, and the US dollar. TerraUSD, a so-called algorithmic stablecoin that was designed to be pegged to the US dollar, crashed following a bank run earlier in 2022.

However, some analysts have suggested that the stETH/ETH decoupling is different. stETH is not a stablecoin, meaning it does not need to trade at a 1:1 ratio with ETH to function properly. The immediate risk of a bank run is also contained because the Ethereum network has not allowed staking withdrawals at this stage.

What is Ethereum?

Ethereum is a decentralized global software platform powered by blockchain technology. The network is known for its native cryptocurrency called ether, or ETH. Ethereum can be used by anyone to create any type of secure digital technology. The Ethereum network natively supports smart contracts, which are the essential tool for decentralized applications.

How does the Proof of Acceptance (PoS) process work?

Proof of Stake (PoS) is a consensus mechanism in cryptocurrencies for processing transactions and creating new blocks in a blockchain. Unlike a proof-of-work (PoW) system, proof-of-stake changes the way blocks are verified using coin owners’ machines. Owners offer their parts as collateral for the chance to validate the blocks. Coin owners who have pledged their coins become “validators”.

What are the effects of decoupling between ether and staked ether?

This decoupling has raised concerns about the stability of the Ethereum network, liquidity for ether holders, and the general health of the cryptocurrency industry. However, the immediate risk of a bank run is contained because the Ethereum network did not allow staking withdrawals.

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Thomas Estimbre
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