The Root of Lido's stETH Peg Troubles

JUN 24, 2022 • 6 Min Read

Duncan Reucassel

DISCLOSURES: DELPHI VENTURES HAS INVESTED IN LIDO (LDO). THE AUTHOR OF THIS REPORT HAS MATERIAL OPEN POSITIONS IN LDO. THE AUTHOR HAS NOT PURCHASED OR SOLD ANY TOKEN FOR WHICH THE AUTHOR HAS MATERIAL NON-PUBLIC INFORMATION DURING THE RESEARCH AND DRAFTING OF THIS REPORT. THESE STATEMENTS ARE INTENDED TO DISCLOSE ANY CONFLICT OF INTEREST AND SHOULD NOT BE MISCONSTRUED AS A RECOMMENDATION TO PURCHASE OR SELL ANY TOKEN, OR TO USE ANY PROTOCOL. THE CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND YOU SHOULD NOT MAKE INVESTMENT DECISIONS BASED SOLELY ON IT. THIS IS NOT INVESTMENT ADVICE.

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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

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