An arbitrage opportunity appears to be emerging already from the latest crypto meltdown, with traders pointing to the price disparity between Ether and a version of the second-largest digital-asset that has been at the center of the recent turmoil.
The token, stETH, represents staked Ether on the Ethereum blockchain and counts troubled crypto lender Celsius and hedge fund Three Arrows Capital as major holders. Since its launch by decentralized app Lido Finance in late 2020, stETH has become one of the most popular collateral assets for lending and borrowing in DeFi. But the recent market illiquidity and stETH’s worsening discount to Ether’s price has now made it the focal point of critical market chatter.
The token’s deterioration is even being attributed as the main driver of Celsius’s decision to halt trading on its lending platform, according to crypto data firm Kaiko. Meanwhile, another crypto company seen as being deep into a liquidity crisis of its own, hedge fund Three Arrows, has sold off a chunk of its stETH tokens.
But as selloff pressures mount, crypto traders are increasing their position in stETH, according to blockchain data and market participants.
Traders see the discount as an arbitrage opportunity since stETH will become redeemable 1-to-1 to Ether after the so-called Merge -- an upgrade to the Ethereum network moving it from proof-of-work to proof-of-stake -- according to Rahul Rai, co-head of market neutral at crypto fund BlockTower Capital.
“If you can buy stETH at 0.85 to Ether and you believe the Merge will happen in a realistic time frame, that’s a 15% return,” said Rai.
Beached Whales
Sophisticated traders in particular are bullish on the discounted stETH, according to blockchain data analytics platform Nansen, which tracks addresses associated with more successful (or more profitable) traders which it has labeled “Smart Money.” The number of those digital wallets holding stETH hit a high of 101 on Wednesday, up from a count of 88 on June 7.
“Plenty of smaller players are playing the [arbitrage trade] as these whales flop around,” said Nansen’s content lead Andrew Thurman, referring to large firms like Celsius and Three Arrows.
Celsius and Three Arrows did not respond to requests for comment.
Three Arrows started withdrawing stETH tokens as early as May, according to Nansen. On June 14, it pulled over 80,000 stETH from DeFi lending project Aave in just four transactions, and then swapped 38,900 of the stETH for 36,700 Ether. The swap represents a loss of 2,200 Ether -- a “big haircut” for a fund like Three Arrows, said Thurman. Meanwhile, Celsius still has about $475 million in stETH holdings, according to a Kaiko post Wednesday citing Dune Analytics data.