Martijn van de Weerdt
28 sep. 2023
The importance of monitoring pegged assets for the wider ecosystem
Pegged assets are ubiquitous in crypto allowing for a host of use cases; from trading real US Dollars on chain to increasing the capital efficiency of staked assets in Proof-of-Stake blockchains. However, not all pegs are created equal. There have been some significant depegs resulting in major losses for ‘pegged’ asset holders and equally massive gains for shorters of these pegged assets. A great example of this is GCR’s public short on UST and Luna of which you can find a good breakdown here.
Luckily, not all depegs are as catastrophic as the UST depeg and can actually present good opportunities to buy distressed assets for cheap. For example, the depeg of Circle’s USDC to 87c in March 2023 following the disclosure of large amounts of their reserves being held at distressed Silicon Valley Bank. This quickly ‘repegged’ on Monday following the announcement by regulators that all depositors would have access to their funds. It is clear that monitoring the health of pegged assets is important and alpha-packed (credit to @consideredfinance for below graph).
As the peg of pegged assets is paramount for the wider Web3 ecosystem, we introduce the Efiko Depeg Dashboard, a central place to monitor the health of pegged assets on-chain across multiple venues. As a first iteration, we have created a Dune Dashboard showing the Peg of different Liquid Staking Tokens (LSTs). Eventually,we plan to include stablecoins and bridged assets.
What is a LST?
Liquid Staking Tokens are a wrapper for staked ETH. By wrapping Staked ETH, users are able to gain additional yield by using them in other DeFi protocols. Over time, staked ETH earns more ETH as a reward. This means there is constant upward pressure on the ETH-lstETH peg. Teams have dealt with this in 3 distinct ways:
Rebasable Tokens (e.g stETH)
Token supply alters algorithmically as a result of staking rewards or possible slashing penalties.
Theoretically pegged 1:1 to native token. This makes them less composable in DeFi and CeFi
Reward-Bearing Tokens (e.g rETH, ankrETH)
Tokens that increase in value over time to reflect staking rewards
Base Tokens + Reward Tokens (e.g Frax’s frxETH and sfrxETH)
Base Token should be pegged 1:1 with ETH (frxETH) whilst other accrues rewards (sfrxETH)
Taking this information we would expect Rebasable Tokens and Base Tokens to maintain a 1:1 peg with ETH and Reward-Bearing Tokens to slowly appreciate against ETH.
The dashboard shows the peg of different ETH Liquid Staking Tokens across the 4 most popular DEX’s; Balancer, Curve, Maverick and Uniswap. Unsurprisingly, Uniswap dominates total volume, accounting for ~57% over the past 30 days. Followed by the newcomer Maverick Finance, which emphasizes more exotic LST pairs (e.g swETH and unshETH). LST pair volume is dominated by Lido’s stETH and wstETH, accounting for ~71% of volume over the past 30 days. In fact, ‘the Big 3’ (Lido’s stETH, Rocketpool’s rETH and Coinbases cbETH) account for over 93% of volume over the past 30 days. There are some exciting newcomers taking market share including Frax Finance’s frxETH and sfrxETH, Swell Network’s swETH, unshETH’s unshETH and many more popping up every day.
How do we evaluate a Depeg?
Depegs are often driven by exogenous events such as hacks, regulatory uncertainty, bankruptcy etc. This means that they are all slightly different and require a subjective evaluation to decide whether the asset will repeg or go to zero. Some important factors to consider:
1. Most important is the amount of the assets or collateral backing the pegged asset. For example, after alETH’s hack and recovery the total backing of alETH sits at around 0.733 ETH per alETH.
2. The liquidity of the asset backing the peg is especially important. Collateral with lower liquidity makes it harder for arbers to maintain the peg. A good example of this is Abracadabra’s Magic Internet Money (MIM) which is essentially a riskier version of DAI that uses yield-bearing tokens as collateral. These tokens are generally further down the risk curve, with lower liquidity and higher volatility resulting in increased peg volatility.
3. Lastly we have market sentiment which could be arguably the most important factor. Depegs are very similar to bank runs in that they are a self-fulfilling prophecy and no one wants to be the last person holding the bag. However, market sentiment is fickle and there are often rallies on the way down. A good case study of this is the Depeg of Multichain wrapped assets on Fantom following the hack of their multisig. Looking at the below graph for DAI you will see that there are significant rallies, as more news comes out and the market believes that Multichain will recover some of their funds. Unfortunately this was not the case and most of the funds are now sitting in the hackers wallets, which you can see in this Dune Dashboard by @synthquest.
alETH Depeg: A Case Study in MEV and Arbitrage with a happier ending
On the 30th of July this year, a zero-day bug was found in the older version of the vyper-compiler allowing large hacks to occur in the Curve ecosystem. As the alETH-ETH curve pool was hacked for ~5000 ETH, the hacker took only the ETH. Leaving behind all alETH in the pool, it resulted in a significant depeg of alETH in the Curve Pool. See below to visualise this depeg.
Due to some excellent investigative work, the Alchemix team was able to bargain with the hacker and get them to return 90% of the funds a week later. This led to a recovery in the alETH peg which currently sits at ~0.74 in the Uniswap pools.
However, alETH holders and LP’s lost a significant chunk of value to arbitrage traders. Alchemix DAO is currently talking about the best course of action to distribute the returned alETH.There are a number of parties involved including liquidity providers, the DAO and arbers. For more info see their governance forums.
A large portion of the damage to alETH holders was done by arbers, in particular MEV-related arbitrage bots. These bots traded 9335 alETH between 30/07/2023- 04/08/2023 for an average price of 0.1066 ETH per alETH. Initially ~3854 alETH left in the pool by the hacker was bought by an MEV bot and immediately dumped for ~614 frxETH. Afterwards, a flurry of arbs occurred by other MEV bots and astute traders, resulting in significant profits. For more info you can see the full breakdown in the alETH dashboard. There may be some alpha in following the wallets that are not MEV bots…
This plot shows the different arb transactions throughout the depeg event
We could not find good enough labels to adequately group MEV related activity and human activity but from our spot checks the majority of the early transactions were done by MEV-bots or MEV related wallets. However, some astute news-driven traders were able to buy alETH upon finding out that the funds would be returned.
Investing in depegged assets much like all trading is a mixture of art and science. The aim of the Depeg Dashboard is to be a centralised place that will help traders track these opportunities and give enough information to start their own deep investigations.
Pegged assets are not going anywhere as stablecoins and liquid staking tokens are undoubtedly the crypto product with the greatest product market fit. In fact, there are some burgeoning sectors such as Real World Assets (RWA’s) and Decentralised Physical Infrastructure (DePIN) where protocols are bringing real life assets on chain, in effect pegging them to a fungible ERC-20. As an industry we need to be very careful about our reliance on pegged assets exemplified by the collapse of Luna/ UST, which was terrific in and on itself, but also had triple effect throughout the whole Web3 ecosystem.
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