iii. Backing

Backing Risk

What happens if LST vs ETH price ‘depegs’?

Lido and exchanges offer 1:1 redemption of stETH and other LSTs into ETH, but there is a chance that in a black swan scenario everyone rushes to unstake their staked ETH and the exit queue builds up. At this stage, protocols reliant on LSTs will have to take a decision to swap the staked token into ETH at a discount immediately, or wait in the exit queue to receive ETH at a 1:1 basis.

How is LST collateral liquidated on CeFi?

In the same manner as any other asset or instrument. It’s important to keep in mind that each exchange has its own liquidation engine design & mechanisms. Generally, exchanges look to close out positions whereby the user no longer has sufficient margin to meet ongoing (maintenance) margin requirements. This often involves the exchange forcibly closing the position across any market with liquidity to reduce the risk. Many exchanges have now adopted an “incremental” liquidation approach vs attempting to close the entire position immediately.

How robust is the pricing of LSTs relative to other assets?

As noted above, spot and derivative markets for staked ETH on centralized exchanges are not as liquid as other assets. The vast majority of liquidity for staked ETH is located on decentralized exchanges. CAMP actively monitors and manages this risk in conjunction with exchanges to promote a fair and orderly market in all conditions.