The relationship between ETH and stETH is often misunderstood—especially during volatile market conditions. While many assume stETH should always trade at a 1:1 ratio with ETH, the reality is more nuanced. This article explores the mechanics of liquid staking, explains why stETH isn't "pegged" to ETH, and clarifies how market dynamics, risk factors, and redemption mechanisms shape its value.
What Is Lido and stETH?
Lido is one of the most widely adopted liquid staking protocols for Ethereum. It allows users to stake ETH without locking up their capital or running complex validator infrastructure. When you stake 1 ETH through Lido, you receive 1 stETH (staked ETH) in return.
Your ETH is delegated to a network of professional node operators. As your validator earns staking rewards on the Beacon Chain, your stETH balance automatically increases to reflect those gains. This means stETH appreciates in quantity over time, not just in price.
Crucially, stETH is not a stablecoin—it's a tokenized representation of staked ETH with accrued rewards. The ability to redeem stETH for ETH became possible after the Ethereum network completed "The Merge" and enabled withdrawals in 2023.
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Debunking the 1:1 Peg Myth
For much of its early lifecycle, stETH traded close to a 1:1 ratio with ETH. However, this proximity led to a widespread misconception: that stETH must maintain this parity to function.
This belief intensified after the UST-Luna collapse in 2022, which left investors hypersensitive to any sign of depegging. But stETH was never designed to be pegged to ETH. Its market price is determined by supply and demand—not algorithmic stabilization mechanisms.
Other liquid staking derivatives illustrate this point clearly:
- Binance’s BETH has traded as low as 0.85 ETH per token.
- Ankr’s ETHC dropped to around 0.80 ETH.
These fluctuations are natural. Like futures contracts or trust-held assets (e.g., Grayscale’s GBTC), stETH reflects both the underlying asset value and market sentiment about liquidity, timing, and risk.
At its core, stETH represents tokenized ownership of locked collateral—and it's entirely reasonable for such tokens to trade at a discount when redemption isn’t immediately available.
How Pricing and Arbitrage Work
There is a built-in mechanism that prevents stETH from trading above 1 ETH: direct minting.
If stETH ever trades above parity—say, 1.10 ETH—you can instantly profit by depositing 1 ETH into Lido, receiving 1 stETH, and selling it for a 0.10 ETH gain. This arbitrage ensures the price rarely exceeds 1:1.
However, no such mechanism exists below parity. If stETH trades at 0.95 ETH, you cannot redeem it for 1 ETH until withdrawals are enabled. Without a redemption path, there’s no direct arbitrage to pull the price back up.
Once full withdrawals are live, two-way arbitrage becomes possible:
- Buy stETH at a discount (e.g., 0.95 ETH)
- Redeem it for 1 ETH
- Repeat until equilibrium returns
Until then, the discount reflects what investors demand as compensation for illiquidity risk.
Market Conditions Drive the Discount
The size of the stETH discount depends heavily on macroeconomic sentiment:
In Bull Markets:
- Demand for ETH is high.
- Investors are willing to lock up capital.
- Liquidity needs are low.
- Holding stETH feels like earning “free yield” with manageable risk.
- As a result, the discount shrinks or disappears.
In Bear Markets:
- ETH demand drops.
- Traders seek liquidity to exit positions or cover losses.
- Fear increases sensitivity to lock-up periods.
- More sellers than buyers emerge in the stETH market.
- The discount widens due to selling pressure.
Additional factors influencing pricing include:
- Smart contract risk
- Governance risk (e.g., LDO token voting)
- Beacon Chain operational risks
- Uncertainty around Ethereum upgrade timelines
While these risks are relatively constant, market fear amplifies their perceived weight, especially during downturns.
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Who’s at Risk During a Crisis?
Two key groups face heightened exposure when stETH depegs significantly:
1. Leveraged Stakers
Users who borrow against stETH (e.g., on Aave) to stake more ETH amplify their exposure. Their process looks like this:
- Deposit ETH → get stETH
- Use stETH as collateral → borrow ETH
- Restake borrowed ETH → repeat
Products like Instadapp automate this loop, creating leveraged yield farms. But when stETH price drops, their loan-to-value ratios rise—triggering liquidations.
Forced selling of stETH during liquidations adds downward pressure on price, potentially creating a negative feedback loop.
2. Centralized Platforms with Large Stakes
Entities like Celsius reportedly held large amounts of stETH while offering yield-bearing accounts to customers. When faced with mass withdrawals:
- They may need to sell stETH quickly.
- But limited market depth makes large sales difficult without crashing prices.
- Even rumors of such sales can spark panic.
Though Celsius had other issues (e.g., exposure to UST/Luna), its reliance on illiquid staking positions highlighted a systemic vulnerability: centralized platforms using long-term locked assets to back short-term liabilities.
Will You Get Your ETH Back?
Yes—eventually.
Once Ethereum enables full withdrawals, 1 stETH will be redeemable for 1 ETH, regardless of its prior market price.
But two caveats apply:
1. Slashing Risk
If Lido’s validators are penalized (slashed) due to downtime or malicious behavior, losses are shared across all stETH holders. This reduces the total ETH backing stETH. For example:
- You hold 10 stETH
- A slashing event occurs
- Your balance might drop slightly (e.g., to 9.98 stETH)
Rocket Pool mitigates this via over-collateralization; Lido and Ankr rely on diversified operators and insurance funds.
2. Protocol-Level Bugs
A critical smart contract flaw could disrupt operations or delay redemptions. While audits reduce this risk, it’s never zero in DeFi.
Other minor risks include:
- Delays in Ethereum upgrades
- Governance attacks (if LDO voting is manipulated)
- Social consensus failures (in extreme scenarios)
Still, given Ethereum’s robust development roadmap and broad adoption, the likelihood of permanent loss remains low.
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Frequently Asked Questions (FAQ)
Q: Is stETH a stablecoin?
A: No. Unlike USDT or DAI, stETH is not pegged to any external value. It represents staked ETH plus rewards and trades based on market demand.
Q: Why does stETH sometimes trade below 1 ETH?
A: The discount reflects liquidity risk—the uncertainty of not being able to redeem immediately. In bear markets, this discount widens due to increased selling pressure.
Q: Can I lose money holding stETH?
A: Yes, if the price drops short-term. However, long-term holders will eventually redeem 1:1 for ETH (minus slashing impacts). Volatility doesn’t erase principal—it affects timing and opportunity cost.
Q: Does depegging mean Lido failed?
A: Absolutely not. Temporary price divergence is expected in non-stable assets. Lido continues functioning as designed—securing Ethereum and generating yield.
Q: What happens after Ethereum enables withdrawals?
A: Two-way arbitrage kicks in, stabilizing the price closer to 1:1. Market confidence typically improves as redemption risk diminishes.
Q: Are other liquid staking tokens similar to stETH?
A: Yes—BETH, rETH, and ankrETH operate under similar principles but differ in operator structure, fee models, and risk profiles.
By understanding the economic forces behind stETH pricing, investors can make informed decisions—separating temporary market noise from structural risks. As Ethereum evolves, so too will the tools that make participation accessible and efficient for everyone.