Update for our ETH vault depositors
The current macro environment has greatly reduced investors’ appetite for risk assets — affecting the overall cryptocurrency and technology market. Within DeFi (Decentralised Finance), this has led to many new “innovative” protocols and mechanisms being tested — as we have seen with the likes of LUNA/UST, WAVES/USDN.
Due to the sustained drop in prices, many crypto institutions have been under pressure due to over-leverage. As a result of this, they have been forced to sell tokens into a declining market.
One of the impacts of increased uncertainty and sell pressure has been seen on stETH. In the following there is a breakdown of the situation, how it could affect YOP depositors and what steps we have taken to make sure your funds are safe.
What is stETH ?
stETH is a staked version of ETH, issued by Lido Finance. stETH is fully backed 1:1 by ETH — unlike UST, which was mainly backed by LUNA. The ETH that has been locked into the Ethereum 2.0 proof of stake network is not redeemable until the Ethereum 2.0 merge is complete. This merge is due to happen before the end of the year but has already been pushed out a few times.
Whilst stETH is not redeemable for ETH directly until after the Merge, there are secondary markets where it can be traded for ETH — exchanges include Curve, Uniswap and FTX. Under normal market conditions 1stETH = 1ETH, however due to leverage unwinding by large stETH holders this peg has come under pressure.
The Curve pool (the most liquid trading venue) has become imbalanced with 80% of pool made up of stETH (ideally there is 50:50 ratio). This has resulted in stETH being around 5% under the peg at the time of writing. This means that you would get back 0.95 ETH for every stETH — compared to the full amount once the Merge is complete.
How does stETH’s depeg impact YOP ETH Vault Depositors?
As mentioned in the documentation (https://docs.yop.finance/yop-ecosystem/products/vaults), a percentage of the funds in the Vaults are allocated to Strategies to generate yield in other DeFi Protocols such as Curve and Convex. In the case of the Ethereum Vault — 53% of funds (81 ETH) are allocated to the stETH pool strategy on Curve, currently yielding over 9% p/a (in ETH).
Since a part of ETH deposits are allocated to stETH (to provide liquidity to the Curve pool), depositors have an exposure to the price of stETH. This exposure is not realised until the YOP Strategy which carries this exposure to stETH is either harvested (claiming yield due) or unwound (withdrawing funds from the strategy). If any of the funds in the strategy are withdrawn, then the divergence in price between ETH and stETH would be locked in and a ~5% loss would be realised.
Once the Ethereum 2.0 Merge completes and the ETH that is locked in Ethereum 2.0 is available to be withdrawn, we fully expect to see the stETH peg restore to a 1:1 with ETH, at which time we can harvest the strategy and realise the unclaimed Yield.
Recommended course of action
Depositors are always able to withdraw their funds from the Vaults, and this will not change. To ensure that none of our users are exposed to the current price variance of stETH in the YOP Strategy, Pluto have deposited approx. 60 ETH into the Vault. These funds will not be allocated to the stETH Strategy, but rather will be used to ensure any users who wish to withdraw their funds can do so safely and at no loss as they will not be triggering any withdrawals from the strategy — all withdrawals will be serviced by the funds in the Vault.
If you are a long-term holder of ETH, and like us, believe that the stETH peg will be restored after the Merge, there are no actions to take — just hold your Vault deposit as normal and once we harvest the strategy after the Merge, you will get a share of the harvested yield.
By keeping your funds in the ETH Vault, you are earning extra high yield from the stETH strategy (as more fees are generated from the market volatility). You can check the balance of the pool and price of stETH at: https://curve.fi/steth
More YOP to you!