Goldman Sachs Says DeFi’s Interconnections Can Increase Systemic Risk

Contagion risk related to UST’s depegging hit staked ether (stETH) because of Lido’s exposure to the Terra ecosystem, the bank said.

AccessTimeIconMay 23, 2022 at 12:56 p.m. UTC
Updated May 11, 2023 at 3:22 p.m. UTC
10 Years of Decentralizing the Future
May 29-31, 2024 - Austin, TexasThe biggest and most established global hub for everything crypto, blockchain and Web3.Register Now

One little-noticed effect of the terraUSD (UST) collapse relates to Lido, a liquid staking protocol, Goldman Sachs (GS) said in a report Friday, and shows how the connections between decentralized finance (DeFi) applications amplify systemic risk.

Lido is a DeFi app that allows ether (ETH) holders to set tokens aside to validate transactions while also earning yield. Investors receive a staked ether token (stETH) at a ratio of 1:1, and can use it as lending collateral or across supported trading pools, the bank said.

The collapse in UST hit stETH, with the token trading at a 4.5% discount to ETH, Goldman said. That’s because stETH holders were able to convert their tokens into bonded ether (bETH) and earn rewards on Terra’s Anchor Protocol. As a result, stETH was vulnerable to Terra blockchain halts, which impact withdrawals, according to the report.

This event is important because Lido has one-third of all staked ether deposited in it and shows how “DeFi’s compostability can theoretically increase systemic risk,” the bank said.

DeFi is an umbrella term used for lending, trading and other financial activities carried out on a blockchain, without traditional intermediaries.

Disclosure

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is an award-winning media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. In November 2023, CoinDesk was acquired by Bullish group, owner of Bullish, a regulated, institutional digital assets exchange. Bullish group is majority owned by Block.one; both groups have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary, and an editorial committee, chaired by a former editor-in-chief of The Wall Street Journal, is being formed to support journalistic integrity.

Author placeholder image

Will Canny is CoinDesk's finance reporter.


Learn more about Consensus 2024, CoinDesk's longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.


Read more about