Can the amount of liquid tokens decrease due to market volatility?
The $45 billion liquid storage sector has investors concerned about the long-term price stability of the cryptocurrencies associated with these protocols.
Liquid Stake creates greater capital efficiency for investors by providing the equivalent of an initial paid token that can be deployed for other decentralized finance (DeFi) applications.
However, Liquid Staking Tokens (LSTs) may temporarily lose their parity with Ether (ETH), said Carlos Mercado, a data scientist at Flipside Crypto research firm.
Mercado told Cointelegraph:
A broader risk is when Ethereum's percentage is high – since liquid-backed tokens don't have instant redemptions, they can “explore” where the open market price diverges from the (often verifiable) open market price during periods of high volatility. ETH support.
According to CoinGecko, maintaining price stability is crucial for Ether-based LSTs, as their cumulative market capitalization stands at $36.5 billion.
High Liquidity Token, Market Capitalization. Source: CoinGecko
Arbitrage bots can solve the LST problem quickly
Although a temporary release may occur during volatile periods, crypto arbitrage bots can quickly resolve such disputes. Arbitrage bots analyze price gaps between crypto assets and make trades to take advantage of those gaps.
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According to Alon Askal, vice president of marketing at SVV Network, these same arbitrage bots can automate the LST paging event. Askal told Cointelegraph:
“Any hostile market movement in any direction, arbitrage bots and user ransoms quickly calmed down and brought the peg back into balance,” the Shanghai update said, allowing protocols like Lido to leave the blockchain and reclaim ETH.
On April 24, the Renzo ETH (ezETH) token lost its 1:1 peg to Ether, temporarily falling to $700 on the decentralized exchange (DEX) Uniswap, while Ether was trading above $3,100.
EZETH/WETH, 15-minute chart. Source: Tommy
Tommy, an anonymous investor in Crypto.com Capital, said the massive selloff was thanks to the end of Renzo's airdrop campaign.
The investor explained in an April 24 X post:
“This led to liquidity in leveraged protocols like @GearboxProtocol and @MorphoLabs. Loopers (users who repeatedly use LRT as collateral to borrow ETH) suffered losses as a result.”
The liquid inventory chain is evolving.
Liquidity has seen significant growth in not only Ethereum but other top blockchain protocols.
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According to Bitbit researchers who told Cointelegraph, on Solana, liquid reserves can increase more than five times.
“In our view, Solana has the potential to raise liquidity due to its active community. Based on Ethereum LST market statistics, the Solana LST market could grow to $18 billion.”
Advanced protocol categories. Source: Defillama
Thanks to the capital efficiency created by the protocols, liquidity in DeFi has grown to become the largest protocol category, with a total value of $45 billion across 190 protocols, according to Defillama data.
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