Goldman Sachs Says DeFi’s Interconnections Can Increase Systemic Risk

Goldman Sachs claimed in a report Friday that one little-noticed aspect of the terraUSD (UST) crash pertains to Lido, a liquid staking protocol, and demonstrates how links between decentralized finance (DeFi) apps exacerbate systemic risk. 

Lido is a DeFi program that allows ether (ETH) holders to set aside tokens for transaction validation while also receiving yield. According to the Goldman Sachs, investors receive a staked ether token (stETH) at a 1:1 ratio and can use it as lending collateral or across supported trading pools.

The UST drop impacted stETH, which is now trading at a 4.5% discount to ETH, according to Goldman. This is due to the ability of stETH holders to change their tokens into bonded ether (bETH) and earn incentives on Terra’s Anchor Protocol. As a result, according to the research, stETH was prone to Terra blockchain halts, which impacted withdrawals.

This event is significant because Lido holds one-third of all staked ether and demonstrates how “DeFi’s composability can theoretically increase systemic risk,” according to the bank.

DeFi is an umbrella term covering lending, trading, and other financial operations that take place on a blockchain without the use of traditional middlemen.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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Patrick

CoinCu News

Goldman Sachs Says DeFi’s Interconnections Can Increase Systemic Risk

Goldman Sachs claimed in a report Friday that one little-noticed aspect of the terraUSD (UST) crash pertains to Lido, a liquid staking protocol, and demonstrates how links between decentralized finance (DeFi) apps exacerbate systemic risk. 

Lido is a DeFi program that allows ether (ETH) holders to set aside tokens for transaction validation while also receiving yield. According to the Goldman Sachs, investors receive a staked ether token (stETH) at a 1:1 ratio and can use it as lending collateral or across supported trading pools.

The UST drop impacted stETH, which is now trading at a 4.5% discount to ETH, according to Goldman. This is due to the ability of stETH holders to change their tokens into bonded ether (bETH) and earn incentives on Terra’s Anchor Protocol. As a result, according to the research, stETH was prone to Terra blockchain halts, which impacted withdrawals.

This event is significant because Lido holds one-third of all staked ether and demonstrates how “DeFi’s composability can theoretically increase systemic risk,” according to the bank.

DeFi is an umbrella term covering lending, trading, and other financial operations that take place on a blockchain without the use of traditional middlemen.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

Join CoinCu Telegram to keep track of news: https://t.me/coincunews

Follow CoinCu Youtube Channel | Follow CoinCu Facebook page

Patrick

CoinCu News

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