The Root of Lido's stETH Peg Troubles

The current Ethereum Proof of Work (PoW) chain will be “merged” with its Proof of Stake (PoS) Beacon Chain (hopefully) sometime in Q3/Q4 2022. With this, Ethereum transitions into a pure PoS network. Staking is live on the Beacon Chain, so users can already lock up ETH in the Beacon Chain to earn staking rewards. However, this ETH will not be redeemable until withdrawals are enabled (estimated at ~6 months after the merge).

Enter: Lido. Lido is a liquid staking derivative provider that allows users to deposit ETH and receive its derivative token, stETH, at a 1:1 exchange rate. Users get stETH as the liquid derivative token, and Lido’s validator network manages all of the complexities behind the scenes – in exchange for 10% of staking returns on that ETH. Win-win.

Before we go further, it’s important to note that stETH issued is backed by an equivalent amount of ETH. When withdrawals are enabled, holders will be able to redeem at a 1:1 rate. Once this happens, stETH should realistically keep its peg at 1