DeFi degens deposit ETH onto Lido Finance to exchange for stETH in the hope of redeeming it for more value ETH after The Merge. Arbitrage games have made some of the biggest crypto fortunes. Some were obvious but difficult to execute, while others were hidden.
You can think of Arthur Hayes and Sam Bankman-Fried. Arbitrage was how they were able bankroll their respective exchanges. The paths of the founders took very different turns after that. While the former pleaded guilty to violating U.S. Bank Secrecy Act this year, the latter emerged as buyer of last resort in the current crypto meltdown.
Both men started out buying and selling crypto at low prices. The Bankman-Fried made a profit from the Kimchi premium and Hayes made a living off , a comparable premium on China’s mainland.
Another potentially lucrative arbitrage is available these days. The value of Lido Staked Ethereum is now at ETH . This token was previously 1:1 with the price of Ethereum.
STETH currently has a value of $1,037 and ETH is $1.081. This is a 4.7% discount for stETH. This discount has been known since a while, so why haven’t the Hayes’ and Bankman-Fried’s of crypto already taken this nice little trade?
It should be simple to buy the discounted stETH, then redeem it for regular ETH, and keep the difference.
It’s not quite true. This is because Lido Fin, the stETH provider operates.
How Lido Finance works
Lido is a staking platform that allows users to deposit Ethereum and receive the stETH back. Users also earn a small amount of yield. Lido takes these deposits and adds them into Ethereum’s Beacon Chain. This is essentially a parallel version of Ethereum’s original proof-of work version (but which uses proof-of-stake).
This is what Lido has been able to offer the most.
Dune Analytics shows Lido commands 31.5% of Beacon Chain’s deposits. This means that more than 4.1 Million ETH are locked up in Lido smart contracts. At today’s prices, that’s $4.4 billion.
The platform generates this yield by staking it on what will eventually become Ethereum 2.0. There is no redemption option currently due to the way that the platform generates this yield (i.e. by staking it onto what will eventually become Ethereum 2.0). Savvy arbitragers will not be able to return stETH deposits they made for the ETH they deposited.
Lido – “While Lido allowed you to trade, transfer, and use your staked Ethereum’ prior to phase 1.5’s launch, you cannot redeem staked Ethereum for Ethereum until transfers are enabled on Ethereum 2.0. Staked Ethereum is minted 1:1 for each ETH staked through Lido. Once’staked’ ETH has been burned, it can be redeemed for Ethereum.
That’s it for stETH. This de-peg is just another failed experiment in the DeFi.
Not quite. It may be a way for some Ethereum bulls to make big on the launch of Ethereum 2.0. Keep in mind that staked Ethereum can only be redeemed for Ethereum once Ethereum 2.0 has been enabled.
In the meantime, you can hypothetically start buying all the discounted Ethereum while you wait to finally redeem it 1:1.
Although it may seem easy, as capturing the Kimchi Premium in its early days, it requires a lot of nerves.
You are assuming that 1) The highly anticipated Ethereum upgrade will actually happen, 2) Lido still exists at that time, and 3) The Merge won’t have caused a drop in the price of ETH, thereby reducing any arbitrage profits.
Ethereum’s current value is four figures. Tomorrow it could drop to three.
The opportunity cost is another consideration. You are also taking a chance that there aren’t more lucrative bets elsewhere. While you wait to redeem the Ethereum, you could miss out on the next big thing.
Grayscale’s Bitcoin trust is another option. It currently trades at a 30% discount on the underlying asset.
However, this bet is essentially a wager on the Securities and Exchange Commission finally approuving a BTC spot exchange traded fund. It’s not clear when this will occur.
For the Merge event: Ethereum developers are saying September for now.