Some of the largest assets of cryptocurrencies are made through arbitrage. Some of them lay in clear visibility, but were too difficult to carry out. Others were hidden.
Think about Arthur Hayes and Sambankman Fried. Arbitrage was exactly the way they were able to fund the launch of their respective exchanges. But since then, the trajectories of the two founders have gone in quite different directions. The former pleaded guilty to violating the US Bank Secrecy Act this year, and the latter emerged as a last resort buyer in the collapse of the latest cryptocurrencies.
Still, they are both clinging to buying cryptocurrencies low and selling them high elsewhere. Bankman-Fried has benefited from South Korea’s so-called kimchi premium, and Hayes earned his money from a similar premium in mainland China.
Recently, there is another potentially favorable arbitrage transaction. Now, the value of the token Lido Staked Ethereum (stETH), which was previously traded 1: 1 with the price of Ethereum, has lost its pegs to ETH.
As of this writing, stETH is worth $ 1,037, ETH is $ 1,081, which is a 4.7% discount on stETH. This discount has been known for some time, but why aren’t any of the Hayes and Bankman Fried cryptocurrencies scooping up this neat little deal?
Sure, it should be easy to buy a discounted stETH, exchange it for regular ETH, and put the difference in your pocket, right?
Well, it’s not accurate. This is due to the way Lido Finance, the stETH provider, operates.
Lido Finance Mechanism
Lido is a staking service that allows users to deposit Ethereum, receive stETH in return, and earn a small percentage of the yield. Lido then receives those deposits and adds them to Ethereum’s Beacon Chain. This is basically a parallel ghost version of the original Proof of Work version of Ethereum (but with Proof of Stake).
Lido has become the market leader for providing this.
Dune Analytics shows that Lido is currently in charge of 31.5% of the deposits in the Beacon chain. In other words, Lido’s smart contracts contain more than 4.1 million ETHs. That’s a whopping $ 4.4 billion today.
There is no redemption mechanism currently available on how the platform is generating that yield (that is, by betting on what will eventually become Ethereum 2.0). Familiar arbitrage traders cannot return their stETH deposits to the first ETH deposited.
From Lido: “In Lido, you can transfer, exchange, and use” staken ETH “before the start of Phase 1.5, but you can only exchange stacked ETH for ETH after transfer is enabled in Ethereum 2.0. increase. “Bet ETH” is created on a 1: 1 basis for all ETH bet through Lido and is burned when the “Bet ETH” is redeemed for ETH. “
This is the case of stETH, isn’t it?As yet another unsuccessful experiment, the market is simply expected to shrug this depeg. DeFi??
Not perfect. In fact, for some Ethereum bulls, it could even offer another opportunity to make a big bet on the successful launch of Ethereum 2.0. Note: “You can only redeem your bet ETH for ETH if transfer is enabled in Ethereum 2.0.”
So, in the meantime, you can scoop up all the virtually discounted ETH while waiting for the moment you can finally redeem 1: 1.
Bet on merge
It may sound as easy as an early capture of Kimchi Premium, but it requires a lot of sutras.
When making such a bet, you assume the following: 1) the long-awaited Ethereum upgrade actually happens, 2) Lido is still present at that time, and 3) ETH prices are merged. It hasn’t plummeted by that time, it runs out of potential arbitrage profits.
Today, Ethereum is still four digits. There may be three tomorrow.
Another consideration is opportunity cost. In making this bet, you also assume that there are no more lucrative bets to be made elsewhere. While waiting for the redemption that Ethereum said, you may miss the next big thing.
Another similar bet you can make is Grayscale’s Bitcoin Trust, which is currently trading at a larger 30% discount on the underlying asset.
However, the bet is basically that the Securities and Exchange Commission will eventually approve the BTC Spot ETF. Who knows when that will happen?
Regarding the merge event, Ethereum developers say it’s September so far.
Want to be a crypto expert? Make the most of Decrypt and send it directly to your inbox.
Get the biggest crypto news articles + weekly summaries and more!