Some of the biggest fortunes in crypto are made through arbitrage plays. Some of them were lying in plain sight, but it was very difficult to execute; Others are hidden.
Think Arthur Hayes or Sam Bankman-Fried. Arbitrage was how they bankrolled their own exchange startups. But after that, the directions of the two founders took very different turns. The former pleaded guilty to violating the US Bank Secrecy Act earlier this year, while the latter has emerged as a buyer of last resort amid the recent crypto meltdown.
Still, the two cut their teeth buying crypto low and selling it elsewhere. Bankman-Fried profited from South Korea’s so-called kimchi premium, while Hayes made its money from the same premium in mainland China.
Currently, there is another potentially profitable arbitrage. Now, the price of Lido Stacked Ethereum (stETH), a token that was previously traded 1:1 to the price of Ethereum, has lost a pig to ETH.
At the time of writing, the price of stETH is $1,037, and ETH is $1,081, a discount of 4.7% on stETH. This price drop has been known for some time, so why haven’t any of the Hayes and Bankman-Fried cryptos picked up on this neat little business?
Of course, it should be easy to simply buy the discounted stETH and then pocket the difference for regular ETH, right?
Well, not exactly. This is how the stETH provider Lido Finance works.
How Lido finance works
Lido is a great service that allows users to deposit Ethereum, receive stETH in return, and earn a small percentage of production for doing so. Lido then takes those deposits and adds them to Ethereum’s beacon chain, essentially a parallel, version of Ethereum’s original proof-of-concept (but using proof-of-stake).
Lido has become the market leader in providing this.
Dune Analysis shows that Lido currently commands 31.5% of the deposits on the Beacon Chain. Otherwise, over 4.1 million ETH are locked up in Lido Smart Contracts. That’s a whopping $4.4 billion at today’s prices.
Given how the platform is generating that product (ie, putting it on top of what will eventually become Ethereum 2.0), there is currently no redemption mechanism available. Astute arbitrageurs cannot return those stETH deposits to the ETH they deposited in the first place.
From Lido: “While Lido allows you to transfer, trade and use your ‘staked ETH’ before phase 1.5, you will only be able to redeem your staked ETH for ETH after transfers are enabled on Ethereum 2.0. ‘staked ETH’ is credited on a 1:1 basis for every ETH deposited through Lido and once ‘staked ETH’ is claimed for ETH, it is burned.
So that’s it for stETH, right? As another failed attempt, the market is expected to simply remove this D-peg DeFi?
Not exactly. In fact, it could be another opportunity for some Ethereum bulls to bet big on the launch of Ethereum 2.0. Remember: “You can redeem ETH held by ETH stake only after transfers are enabled on Ethereum 2.0.
So, in the meantime, you can collect all the discounted ETH while you wait for the moment when you can finally redeem it 1:1.
Bet on integration
In the early days it may seem as simple as picking up a kimchi premium, but it takes a lot of nerve.
When you make a bet like this: 1) the much-anticipated Ethereum upgrade will actually happen, 2) Lido will exist at that time, and 3) the price of ETH won’t drop during the merger. , eating up any potential arbitrage profits.
Today, Ethereum is still at four digits. Tomorrow, it may go down to three.
Another consideration is opportunity cost. When you make this bet, you are assuming that there are no more profitable bets to be made elsewhere. As Ethereum has said, they may miss out on the next big thing while waiting to be redeemed.
Another similar bet you can make is on Greyscale’s Bitcoin trust, which is currently trading at a 30% discount to the underlying asset.
In that bet, though, you’re essentially betting on the Securities and Exchange Commission finally approving a BTC spot ETF. Who knows when this will happen.
As for the integration event, Ethereum developers are saying September-now.
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