liquidity
On-Chain
As a liquid staking derivative, liquidity is obviously paramount. Since stETH’s inception, Lido DAO has prioritized Curve’s stETH-ETH pool as the token’s primary source of liquidity. The DAO incentivized users to provide liquidity in this pool by providing LDO token rewards; without the incentives, it’s hard to justify LPing here, as users are essentially cutting their yield in half by being exposed to stETH and ETH instead of just stETH. Late last year, the DAO was distributing 2.5mn LDO tokens per month to liquidity providers (LPs) on Curve.
However, since June 2023, these incentives have been eliminated entirely, with the stated rationale that DEXes no longer have to be the primary source of liquidity because withdrawals have been enabled post-Shapella.
The chart below shows the net change in liquidity in the Curve stETH-ETH pool, beginning just before the FTX collapse.

In just one day, nearly 400k total ETH and stETH were removed from the pool. There was a partial recovery before over 200k was removed on the day of USDC’s depeg. Since Shapella, which enabled withdrawals of staked ETH, over 500k has been removed. Currently it holds 200k ETH and 201k stETH and is still the largest pool on Curve at $750mn.
The two main takeaways from this are: 1) the pool is prone to rapid contraction in periods of stress; and 2) there is a clear downwards trend since Shapella that is in line with Lido DAO’s assertion that DEXes will no longer be the primary liquidity venue for stETH.
However, the problem with relying on ETH withdrawals is the time delay; according to Lido a withdrawal can take 1-5 days under “normal circumstances” and takes longer during periods of high demand. It’s easy to imagine a scenario in which liquidity continues to dry up in Curve, a market event (like FTX’s crash or USDC’s depeg) causes even more liquidity to be removed, the withdrawal queue lengthens, and stETH holders want to swap into ETH, leading stETH to fall relative to ETH.
Off-Chain
Unfortunately, there’s also a lack of liquidity off-chain. And, contrary to what some DeFi purists might believe, off-chain liquidity does matter for stETH. In fact, last week Bybit facilitated almost exactly the same stETH volume as Curve. This was the first time a CEX registered a significant portion of volume since the fall of FTX.

Despite increasing CEX volumes, stETH’s off-chain liquidity is extremely poor. stETH is the seventh largest token by market cap but its liquidity doesn’t register on a chart with ETH, with just $185k in bids within 0.5% of the mid price, aggregated across all exchanges. It is 400 times less liquid than ETH.

Off-chain liquidity is particularly important for any DeFi protocols that use an oracle, especially for stETH-USD. As I write this, the 19 Chainlink oracles for stETH-USD are reporting prices between $1,906.98 and $1,919.60 and are very likely incorporating CEX prices to generate these prices. The lack of off-chain liquidity makes these oracle prices more volatile, which is especially important when considering our next topic: leverage.