The value of the liquid staking derivative stETH is down 2.3% today to 0.937 eth when they’re equivalent to one staking eth.

The ratio has kept to circa one eth since they launched on Christmas day 2020, but it dropped to 0.97 eth last month and has now dropped further.

Celsius, which has been under pressure due to having much of its eth in stETH to the point it now has paused withdrawals, is pointed out as one of the reasons for this fall in stETH’s value.

Yet, it is fairly impressive that stETH has kept a straight one to one until May because it’s not possible to do arbitrage.

You can’t convert stETH into actual eth, but you can convert eth into stETH, making the dynamics complex.

That’s because stETH gives staking rewards, about 5% a year. So in theory it should be worth more than actual eth.

On the other hand stETH is locked for an indeterminate amount of time, though estimated to be one year, and so conceptually you can’t really turn it into fiat. You can one stETH, but theoretically you can’t turn all of it into fiat since the eth is locked.

So during bull stETH is great. During bear, if you could unlock staking eth right now, you’d expect the total amount deposited to start falling because price is falling and so keeping your eth locked to stake is less attractive.

The staking queue has cleared for the first time as far as we are aware. So that lower demand for staking eth should translate to a discount in stETH’s price.

A discount isn’t a depeg. There’s no peg here at all. An stETH is an actual eth, staking. Ownership of the stETH is direct ownership of the eth, at least if the code works right but that’s the intent anyway.

Thus a discount would be just a market judgment, although Celsius was selling quite a bit of stETH which might have been adding pressure, but FTX was buying it up.

In the case of Celsius it was a bit different however presuming people deposited eth and they expect eth back. If Celsius turned some of that into stETH, then they’ll get less eth if they sell now, and so you get a loss in eth amounts due to the added dynamics of being a beneficial owner.

If you’re custodying stETH yourself, then the choice is between selling now at a discount or waiting until the unlock to get your full eth.

Different people will make different choices, and so you get a market price reflecting it. But from a pure price perspective, and as bad as it would be for some, if stETH somehow vanished, then the supply of 10 million eth suddenly vanishes from the market, and so price should go up.

Turning that stETH into eth should also increase eth’s price. Otherwise it shouldn’t affect eth’s price at all because until the unlock these are different assets.

Yet the certainty of the unlock gives stETH some comparative value and a conceptual floor because longer term holders will increase demand the more it discounts.

But there is no comparable situation where a Luna style collapse develops for stETH because stETH is actually eth.

Clearly since that Luna collapse sharks, who presumably benefited significantly from shorting it, are circling. But hopefully in eth they’ll find only dolphins as we expect the many coders to have audited the many different projects, especially if the project is mentioned in these pages.

Still, where code bugs are concerned there’s never a guarantee, but Luna wasn’t a code bug. Luna was conceptually flawed.

stETH doesn’t have a conceptual flaw as far as we can see, but it doesn’t have a peg either. In fact before it was invented we described something like it and eth as being two different universes because you can’t arbitrage.

Still they related because you’ll get the eth once it’s unlocked, but in theory until then stETH can trade at 0.1eth or 2eth. In practice that’s unlikely because everyone likes a no-brainer buy or sell, unless of course there’s a bug or the code doesn’t do what it’s meant to.

That is all to say, Luna was most likely a one off. No one cared about the project or even knew of the project until they started buying bitcoin in March. At that point Do Kwon should have known that once you near the light, you better be able to withstand the heat as Nakamotos will be watching.

His project obviously couldn’t hold for a month as it was so trash, but stuff like stETH has had even Danny Ryan comment on it. Now he might have not looked at the code, but it would be a very very big failure if the stETH code doesn’t do what it is meant to do.

And if it does do what it is meant to do, then as far as we are concerned it can trade at 1 gwei or 10 eth, irrelevant because it is actually one staking eth.

That is not to say that, talking more generally, some projects didn’t let themselves get a bit loose during the bull, they may have. But, although bugs can never be discounted, the seven years of trial by fire in the eth ecosystem should hopefully mean sharks get to meet only dolphins here.