The staked ether (stETH) token is a cryptocurrency that would ideally be used to represent an Ethereum token deposited in order to support blockchain operations. The protocol for thetoken was designed on Lido, which is a decentralized finance protocol.
stETH is a token that launched in 2020 as Ethereum moved to the proof-of-stake consensus mechanism. It works as a liquidity token where you can deposit ETH into a smart contract on the Lido blockchain to receive an equal amount of stETH. This newly received stEthcan be traded, exchanged, borrowed against, or used for any other liquid purpose.
In order to grasp stETH, it is crucial to start with a comprehension of “staking” cryptocurrency tokens. Proof-of-stake is the process used by Ethereum, which was completed in September 2022. Ether (ETH) is what provides fuel for the Ethereum blockchain engine.
In order to become a validator and take part in the network, users must offer ether as a “stake.” By doing this, they are showing that they’re interested in remaining an honest blockchain participant. The cryptocurrency that is staked can be taken away if the validator doesn’t act accordingly and make decisions that would benefit the blockchain and other participants.
By staking their cryptocurrency, owners are allowed to validate new transactions. As a reward for their confirmation work, they receive a percentage of the transaction’s value. Although this may sound ideal, there is a significant downside: users cannot unstake their crypto until the Ethereum Shanghai upgrade has been completed. This puts them at risk of losing money if the market crashes before then.
Ether investors who desire to become validators must stake 32 ETH– considerably more than what the average ether investor owns. Or, they can choose to participate in a validation pool which requires that their crypto be locked up.5 Lido Finance allows users exchange an amount of Ether for stETH without having to lock up their investment.
stETH is a liquidity token that functions similarly to derivatives, such as futures contracts. With stETH, users can trade, lend, or use the capital they have tied up in ETH tokens even while their original assets are being staked.
While stETH is designed to take the place of ETH, there are several use cases for it- though be mindful as some of these can up the ante when it comes to risk.
Liquidity pools: ETH can be staked with stETH in a liquidity pool, letting the user unstake their ETH for stETH when desired. This is called a pool swap.
Lending:Lending platforms, for example Aave, let users borrow other cryptocurrencies by wrapping their stETH. By doing this they are essentially doubling the value of the cryptocurrency- where the worth of the lent token is based on the wrapped tokens value which itself is based on underlying stake’s value.
Yield Farming: If you stake your ETH, you earn interest; if you choose stETH, however, you can use it as a method to earning yield. People who have tokens can deposit them on a Harvest-like platform and receive yields; in other words, they essentially double their earnings.
Derivatives: Insurance derivatives and put/call options are starting to become popular alternatives.
In the spring of 2022, stETH became an issue in the cryptocurrency investing community as the cryptocurrency market experienced significant turbulence—many of the leading tokens shed a significant portion of their value. Staked ether (stETH) played a role in the market chaos because its price fell below ETH’s, although prior to this they had been trading at around the same value.
However, after the decoupling in price, stETH still tracked ETH’s price movements, just at a lower percentage. This continued until fall of 2022 when it only differed by a few dollars. Its important to remember that stETH was not meant to be an exact replica of ETH’s value–it was designed as a 1:1 token exchange system instead of a 1:1 value exchange.
Some analysts have argued that stETH/ETH decoupling is unlike a stablecoin losing its peg. Stablecoins, by definition, are digital assets pegged to another asset — usually the U.S. dollar — so they don’t fluctuate in value like other cryptocurrencies do. They function as intended by always trading at 1:1 value ratios to their Reference Currency (in most cases, USD). Meanwhile, stETH is not a stablecoin but rather designed to meet investors’ liquidity needs while still functioning properly.”