According to a detailed report from blockchain analytics platform Nansen, Terra’s collapse contributed to the insolvency issues at both Celsius and Three Arrows Capital and most definitely contributed to sETH’s depegging.
Lido Finance enables users to begin staking on Ethereum’s proof-of-stake chain before using the token stETH to represent staked Ether. Now Lido issued a new governance proposal asking the community to vote ‘for’ or ‘against’ limiting Ethereum staking on the protocol.
On decentralized exchanges and platforms, investors can stake or trade their ETH for stETH, borrow ETH using stETH as collateral, lend their stETH for high yield, sell their ETH for stETH and continue in a loop to maximize reward and return.
However, if the price of stETH falls significantly in relation to the price of ETH, high-leverage holdings might be liquidated.
Investors started trading their stETH for ETH in a pool for the tokens on the decentralized crypto exchange Curve after UST depegged in May and dropped far below $1.
According to Nansen’s report, this caused the start of draining pool liquidity and stETH discount.
This started to have an impact on the market as a whole, especially for individuals using the well-known decentralized cryptocurrency lending technology Aave and stETH.
According to Nansen, Lido introduced a temporary safety feature to permit overleveraged players to safely de-lever their holdings.
While this was successful and the price of stETH remained largely steady, things changed when there was more selling pressure. The peg between stETH and ETH was never restored once it diverged on May 14.
The addresses Nansen identified as Celsius and 3AC’s were among the largest withdrawers of stETH and ETH in the Curve pool at the time, taking a combined total of about $800 million in liquidity on May 12 alone.
Other players were also seen taking out cash, but these two were the most important to the pool’s wellbeing, according to Nansen.
These transactions were most influential to the first departure [of stETH] from the ETH price, which led to the vulnerability of the pool and peg, Nansen noted alongside the implosion of UST.
This susceptibility is an extra danger for investors who are already dealing with the turbulence of a probable extended bear market and are vulnerable to weaker risk tolerance, thus exacerbating the selling pressure of stETH, the article states.
Throughout the month of June, investors de-risked their holdings by decreasing liquidity and/or selling stETH for ETH. It looks that Celsius and 3AC made the same attempt.
Nansen came to the conclusion that Celsius may have started borrowing other coins like USDC and USDT in order to meet redemption requests from its customers when the liquidity in the Curve pool started to decline.
According to Nansen, 3AC deposited their stETH as security on Aave in an apparent attempt to borrow ETH from the protocol and then sell it.
As the stETH depeg continued from mid-June onward, 3AC started to sell its stETH, withdrew from the Curve pool, sold its Aave positions, and made an effort to pay back its loans.
Also Read: Aave to freeze stETH, MakerDao D3M vault at risk!!
The market slump, the UST and Luna crash, and this circumstance probably made matters worse for Celsius and 3AC.
“3AC seemed like a victim of the contagion. A case of the wrong place, wrong time,” the report noted.
Based on the on-chain statistics, Nansen sees that 3AC was unlikely to have been the driving force behind the substantial divergence in stETH prices between June 9 and June 11.
3AC didn’t appear to have begun unwinding its stETH bets for ETH and stables until June 13 and 14, decreasing its risks and possibly accepting its losses.
Currently, Celsius is seeking support from its users to avoid having to file for Chapter 11 bankruptcy, as advised by its lawyers. In the case of 3AC, a court order for liquidation of Three Arrows Capital was issued on June 27 in the British Virgin Islands.
