Collateral Risk

A portion of deUSD's backing is comprised of staked Ethereum (stETH). While stETH is backed by ETH, fragmented liquidity and technical risks with staking infrastructure providers could lead to a lasting depeg.

In addition, deUSD also has exposure to sDAI, the staked version of DAI. Staked DAI and DAI are interchangeable 1:1 with no lock or cooldown, and holding DAI has the same risk profile as holding staked DAI.

Collateral Risk of Staked Ethereum (stETH)

Staked Ethereum (stETH) is a token representing staked Ether in Ethereum 2.0’s proof-of-stake (PoS) network. It provides liquidity for staked assets, allowing holders to participate in DeFi activities while earning staking rewards. However, the use of stETH introduces several collateral risks that can impact its value and utility. This section outlines the key collateral risks associated with stETH and provides strategies for mitigating them.

1. Price Volatility Risk

The value of stETH is intended to be closely pegged to ETH, but it can still experience price volatility.

  • Market Fluctuations: The price of stETH can be influenced by market supply and demand, leading to deviations from the value of ETH. Factors such as liquidity, market sentiment, and trading volumes can cause significant price swings.

  • Arbitrage Opportunities: Price discrepancies between stETH and ETH can create arbitrage opportunities, which may lead to short-term volatility as traders exploit these gaps.

2. Liquidity Risk

The liquidity of stETH in various DeFi platforms can impact its usability as collateral.

  • Withdrawal Delays: During periods of high demand, withdrawing stETH or converting it back to ETH may take longer than expected, especially if liquidity is insufficient on the chosen platform.

  • Market Depth: Limited market depth can exacerbate price volatility and make large transactions difficult without significant price impact.

Mitigation Strategy: Diversify holdings across multiple platforms and staked ETH versions to ensure access to liquidity, and use platforms with high trading volumes and deep liquidity pools.

3. Smart Contract Risk

stETH relies on smart contracts to function, introducing risks associated with smart contract vulnerabilities.

  • Bugs and Exploits: Vulnerabilities in the smart contracts governing stETH could be exploited by malicious actors, potentially leading to loss of funds or destabilization of the stETH-ETH peg.

  • Contract Upgrades: Changes or upgrades to the underlying smart contracts might introduce new risks or require users to migrate their stETH holdings.

4. Staking Risks

The staking mechanism itself presents risks that can affect the value and reliability of stETH.

  • Slashing: Validators can be penalized (slashed) for malicious or negligent behavior, which can lead to a reduction in the staked ETH and, consequently, the value of stETH.

  • Validator Performance: The performance and reliability of validators directly affect staking rewards. Poorly performing validators can lead to lower returns for stETH holders.

5. Regulatory and Compliance Risk

Changes in regulatory environments can impact the use and value of stETH.

  • Regulatory Crackdowns: Legal actions against staking services or platforms offering stETH could limit its availability and usability.

  • Compliance Requirements: New compliance requirements might impose additional burdens on stETH holders or the platforms supporting it.

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