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Lido Staked Ethereum (stETH), a DeFi Ethereum derivative, has significantly diverged in the last 48 hours. The coin, which is intended to be pegged to ETH 1:1, is currently trading at $1,473 and has dropped by 7% in the last 24 hours. ETH, on the other hand, is currently trading at $1,536.

Since late Thursday, stETH has been depegging, with the first wave of losses originating from a major $1.5 billion dump by Alameda Capital, one of the top stETH holdings. Reportedly, Alameda has disposed of all of its token holdings.

Panic Selling due to losses?

There is no direct correlation between ETH pricing and stETH. It can only be redeemed for ETH once the merger is complete, which is yet to be determined. However, the token’s primary function as collateral on DeFi platforms like AAVE and Lido could be disastrous for the industry. Shocking losses in stETH have triggered panic selling in Ethereum.

stETH, which represents Ethereum 2.0 beacon chain-locked ETH, is commonly used as collateral on DeFi services to borrow more ETH.

However, if the token’s price falls sharply, positions that have borrowed ETH with the token may be liquidated. Holders will be forced to sell their stETH on the open market, causing the token’s price to plummet even further.

Despite the fact that this incident has had minimal direct impact on ETH prices, it looks to be triggering panic selling of the second-largest cryptocurrency. In the last 24 hours, the price of ETH has dropped by over 11%. The uncertainty surrounding the merger has exacerbated the selling pressure.

Celsius to Flood with Redemption?

Celsius, a DeFi platform, has currently locked a large amount of user assets into stETH, which is subject to redemption. If clients are alarmed by the current stETH price drop, a bank run could occur, flooding Celsius with redemptions and potentially precipitating a liquidity crisis.

If stETH selling becomes more intense, DeFi giants AAVE and Lido, which own substantial amounts of the token, may face a liquidity crunch.