The price of stETH, a liquid staking derivative issued by Lido Finance, has recently shown signs of divergence from the underlying value of Ethereum (ETH). This growing gap is raising concerns across the decentralized finance (DeFi) ecosystem, particularly regarding leveraged positions and broader market stability. While the situation isn’t yet critical, understanding the mechanics behind stETH, its relationship with ETH, and the implications of Ethereum’s upcoming upgrades is essential for investors and DeFi participants.
What Is stETH and How Does It Work?
stETH (staked ETH) is a tokenized representation of ETH that users receive when they stake their Ethereum through Lido Finance. Unlike traditional staking, where assets are locked and illiquid, stETH allows holders to maintain exposure to staking rewards while keeping their assets usable in DeFi protocols.
When you stake ETH with Lido, you receive stETH at a 1:1 ratio initially. Over time, as staking rewards accrue on the Beacon Chain, the exchange rate between stETH and ETH gradually increases—meaning each stETH becomes redeemable for slightly more than one ETH in the future. However, this doesn’t mean stETH trades at par with ETH on open markets.
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Key Features of stETH:
- Backed 1:1 by staked ETH deposits
- Accrues yield automatically as Ethereum validates blocks under Proof-of-Stake
- Highly integrated into DeFi, used as collateral on platforms like Aave and Curve
- Not immediately redeemable for ETH until post-Merge withdrawals are enabled
Despite being backed by real ETH deposits, stETH’s market price is determined by supply and demand dynamics in secondary markets—primarily decentralized exchanges like Curve.
Why Is stETH Trading Below ETH?
As of recent data, stETH has been trading at a discount of around 5% compared to ETH on Curve’s liquidity pool. This means 1 stETH can only be swapped for approximately 0.94 ETH. Several interrelated factors contribute to this price divergence:
1. Market-Wide Deleveraging
Following the collapse of Terra (LUNA) in May 2025, crypto markets entered a risk-off phase. Investors began unwinding leveraged positions across DeFi platforms, leading to increased selling pressure on assets like stETH that are commonly used as collateral.
2. Low Liquidity on Curve
The primary exchange for stETH/ETH swaps is Curve’s dedicated pool. When large volumes are sold—such as a confirmed transaction involving 50,000 stETH—the pool’s balance shifts dramatically. With ETH reserves dropping to just 20% of the pool, slippage increases, exacerbating price drops during large trades.
3. Uncertainty Around The Merge Timeline
Although Ethereum’s transition to Proof-of-Stake (PoS), known as The Merge, was completed in 2025, full withdrawal functionality for staked ETH was rolled out gradually. Until users can freely withdraw their staked ETH and rewards, stETH remains an illiquid promise rather than a fully fungible asset—contributing to its discounted valuation.
Risks to DeFi and Leveraged Positions
One of the biggest concerns surrounding stETH’s price drop is its widespread use as collateral in DeFi lending markets.
Many users employ a leverage loop strategy: depositing stETH on platforms like Aave, borrowing ETH against it, then restaking that ETH to mint more stETH—amplifying returns. But this strategy becomes dangerous when:
- stETH’s price falls
- Loan-to-value (LTV) ratios exceed safe thresholds
- Liquidation triggers force automated sales of collateral
If a wave of liquidations occurs, the resulting sell-off could further depress stETH prices, creating a negative feedback loop. Institutions like Celsius Network were known to hold massive stETH positions—nearly 450,000 stETH worth $1.5 billion—backing $1.2 billion in debt via Aave. While such cases have stabilized since 2025, the systemic risk remains relevant during periods of high volatility.
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Will stETH Re-Peg to ETH?
According to Lido Finance and several analysts, a full peg to ETH isn’t necessary for stETH to function effectively. Unlike algorithmic stablecoins such as UST, which collapsed due to broken mechanisms, stETH is directly backed by real ETH deposits. Even if it trades at a discount, the underlying collateral remains intact.
Mika Honkasolo, a blockchain researcher, notes that even if stETH dips to 85% or lower of ETH’s value, it doesn’t indicate a failure of trust in Lido—but rather reflects market sentiment and liquidity constraints.
However, if prices fall too far—say below 0.65 ETH per stETH—the risk of cascading liquidations increases significantly.
Post-Merge Outlook: A Path to Recovery
After The Merge and subsequent network upgrades enabling withdrawals, stETH’s utility was re-evaluated positively:
- Users could finally redeem staked ETH plus accumulated rewards
- Confidence in Lido’s model strengthened
- Demand for liquid staking derivatives rebounded
Lido argues that buying stETH at a discount effectively gives investors early access to future staking yields at a reduced cost. For long-term holders, this presents an opportunity: purchasing yield-bearing assets below face value while maintaining full exposure to Ethereum’s ecosystem growth.
Frequently Asked Questions (FAQ)
Q: Is stETH backed by real Ethereum?
A: Yes. Every stETH token is backed 1:1 by actual ETH deposited into Ethereum’s official Beacon Chain via Lido validators.
Q: Can I redeem stETH for ETH now?
A: Yes. Since withdrawal functionality was enabled after The Merge and related upgrades in 2025, users can redeem stETH for ETH plus accrued rewards through Lido or supported wallets.
Q: Why does stETH trade at a discount if it's backed by ETH?
A: Because its market price reflects secondary market dynamics—liquidity, sentiment, and redemption delays—not just collateral value. Illiquidity fears and leverage unwinds often drive temporary discounts.
Q: Could stETH collapse like UST did?
A: No. UST was an algorithmic stablecoin without sufficient backing. stETH is fully backed by real ETH and doesn't rely on complex incentive mechanisms to maintain value.
Q: How is Lido different from other staking providers?
A: Lido offers liquid staking—users get tradable tokens (stETH) instead of locked assets—enabling participation in DeFi while earning staking rewards.
Q: Where is stETH most actively traded?
A: The main trading venue is Curve’s stETH/ETH liquidity pool, which dominates volume and pricing for the pair.
The current discount in stETH pricing reflects short-term market stress rather than structural flaws. As liquidity improves and confidence grows in Ethereum’s post-Merge architecture, the gap between stETH and ETH is expected to narrow naturally.
For informed investors, this moment may represent a strategic entry point—one that combines yield potential with deep integration into the evolving DeFi landscape.
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