As Staked Ethereum (stETH) Slumps, MakerDAO Seeks An Alternative

DeFi giant MakerDAO’s community on Friday approved a proposal to adopt another staked Ethereum derivative, after Lido-Staked Ethereum (stETH) de-pegged from ETH.

In a governance proposal that saw 64% approval by the MakerDAO community, users voted in favor of Rocket Pool ETH (rETH) as a new vault type, or collateral.

The protocol will now hold an “executive vote” in the next thirty days to on-board the token as a collateral. The proposal to use rETH had been floated as early as March 2021.

rETH behaves similarly to stETH, in that it represents staked ETH, and can be redeemed for ETH once the blockchain transitions to proof-of-stake.  The token is issued by staking protocol RocketPool, which is based on specifications by ETH creator Vitalik Buterin.

rETH is trading at $1,093, just a few dollars off ETH prices. In comparison, stETH is trading at 0.94 of ETH.

MakerDAO seeks to cut stETH exposure

The proposal to adopt rETH comes as the largest DeFi protocol seeks to reduce the fallout from a potential insolvency of crypto lender Celsius and Three Arrows Capital.

Both the entities have a high amount of stETH as collateral, and were seen dumping stETH to cover their positions. A liquidation of the two would see a large amount of stETH, ETH and Bitcoin being dumped on the open market.

Earlier this week, MakerDAO had also disabled direct deposits with peer Aave, amid concerns over the latter’s high exposure to stETH. The exposure makes Aave extremely vulnerable to a Celsius or Three Arrows liquidation.

Is Lido Staked Ethereum a problem for markets?

While stETH has no direct impact on ETH prices, its use as collateral on DeFi platforms can eventually liquidate ETH positions, which in turn could impact prices.

A slew of liquidations since last week, following stETH’s de-peg, have severely impacted ETH prices. The depeg was triggered by one of the token’s largest holders, Alameda Research, offloading its stake.

Focus now turns to ETH and Bitcoin prices. If the two drop below key levels, the market could see another round of liquidations, which are expected to bring valuations to mid-2020 lows.