The LST Pricing Problem

Another issue that is becoming apparent is that pricing stability between LSTs, as well as against native ETH, is a persistent issue - and seemingly isn’t being resolved despite liquidity at an all-time high. A clear and recent example of this is the constant mispricing, or depegging that has occurred time and time again with the ETH-stETH pool on Curve Finance - with one of the more significant and extended events receiving mainstream media coverage. Due to the lack of utility for the LP token of this pool (with the exception of staking it within CRV gauges for token emission-fueled APR), the pegging of stETH is reliant on individuals deliberately taking advantage of the natural discount upon one of the assets, with minimal benefits for liquidity providers.

stETH is marred by constant periods of depegging, despite having the most TVL of any of the LST solutions.

On the other hand, is an LST like SETH2, which as shown in the chart below - doesn’t suffer from the same issues as stETH - due to the use of UniswapV3’s “concentrated liquidity” feature. This effectively removes the ability for a user to purchase ETH or SETH2 at any price other than 1:1, resulting in minimal volatility. While great for maintaining a peg, the benefits end there - as due to low volatility, there is little reason to trade on the pool, resulting in low fees for LPs, and because the LP token of this pool has no usecases, there is no way to compound your yield as a user/LP - negating the value of “Liquid” Staking.

Most LSTs find it difficult to maintain consistent pricing due to the reliance on organic market activities and few benefits for LP holders.

We now have a recent development within LSDfi, with protocols that mint a secondary LST upon single-sided depositing of primary LSTs (like stETH, rETH, cbETH, etc) - and maintain an artificial peg algorithmically. While fine in theory, and we've yet to see any "depegging" of this model - being such a brand new niche, the supply and demand cycle has yet to see meaningful critical mass to actually put this model to the test. We do however have other examples of this model, with the most famous one of all perhaps being $CRV wrappers - such as cvxCRV, yCRV and so on, which been seeing quite significant mispricing and a mechanism for returning to peg seemingly reliant on long-term conviction of holders/buyers.

Depegging as much as 20% isn't ideal for a token that should see any variance whatsoever.