Lido’s stETH Liquidation May Cause Significant Volatility

Aave, one of the biggest DeFi non-custodial liquidity markets, just stopped giving away ETH, as the whole world is preparing for the Ethereum merge with the Beacon network. This event has been the hottest topic in the crypto community and caused a lot of market movements that many were not ready for. The new temporary resistance level reached in the middle of August was a short-lived bull rally that didn’t last for a long time. Eventually, the price went down back to its July level.

However, the merger is not only a good excuse for speculators to control the market and cause chaos among investors. It is a complicated technological process and it will change how the network operates on a fundamental level by changing the consensus mechanism to Proof-of-Stake instead of Proof-of-work (the main mechanism employed by Bitcoin and many other networks where mining is a key component of transaction validation).

Aave and other liquidity providers are locking ETH lending to stay safe until the Ethereum network proves that it is stable and operational. Despite claims from tech-geeks that there is nothing to worry about, many companies want to stay away from testing their luck. A two-week pause will not hurt holders of ETH, but it will affect staking platforms like LIDO where stETH leverage pools are now taking a hit with some yielding strategies on InstaDapp falling to negative values (USDC and ETH are down to -28% and -25% respectively).

It means that many people who have leveraged positions will likely try to liquidate them releasing over $100 million worth of stETH and causing significant volatility. If the price tanks hard just before the merge, it could be a very good opportunity for many traders to capitalize on the downtrend and “buy the dip”. However, no one knows what will happen in the nearest future with so much going on simultaneously.

Remember that we have seen massive volumes of ETH moved to exchanges in, what seems to be, a preparation for a huge selloff. For people who have leveraged ETH positions, it is a good moment to rethink their strategies.

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