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