Bessie Liu

The long-awaited Ethereum Shanghai-Capella upgrade is <a href="https://blockworks.co/news/ethereum-set-date-for-eth-withdrawals">right around the corner</a>, and it will enable validators to withdraw their staked ether from the network.



To participate in staking and earn rewards on Ethereum, individual validators must lock in 32 <a href="https://blockworks.co/price/eth" target="_blank" rel="noreferrer noopener">ETH</a> (about $52,500) into the staking contract. 



Activating withdrawals will enable these Ethereum stakers to claim rewards for participating in securing the network, and eventually to completely reclaim their locked-up ether, if they so choose.



But what about those who don’t run their own validator nodes and instead rely on one of a plethora of staking services or liquid staking tokens?



As April 12 draws near, these staking service providers must plan how to enable withdrawals as well.&nbsp;



“If you are part of a staking pool or hold liquid staking derivatives, you should check with your provider for more details about how staking withdrawals will affect your arrangement, as each service operates differently,” the Ethereum Foundation <a href="https://ethereum.org/en/staking/withdrawals/">said</a> in a blog post.&nbsp;



Following the upgrade, users will have the option to redeem their underlying staked ether or switch staking providers.&nbsp;



“If a particular pool is getting too large, funds can be exited and redeemed, and re-staked with a smaller provider. Or, if you’ve accumulated enough ETH you could stake from home,” the blog post said.



<a href="https://blockworks.co/tag/lido" target="_blank" rel="noreferrer noopener">Lido</a> — one of the largest liquid staking service providers, with a market capitalization of a little over $10 billion — won’t allow its users who hold <a href="https://blockworks.co/price/steth" target="_blank" rel="noreferrer noopener">stETH</a> to redeem ETH initially. The Lido DAO noted on <a href="https://twitter.com/LidoFinance/status/1635739571227951117?s=20">Twitter</a> that a needed upgrade is expected by mid-May, citing security checks.



Calling the delay “a safety margin,” the group tweeted that “stETH withdrawals won’t launch on mainnet until all audits concerning on-chain code are completed.”



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">An update on Lido Ethereum withdrawals: TL;DR: &#8211; Lido DAO is currently undertaking 7 V2 audits. &#8211; Codebase is very close to being finalized. All major fixes have been merged. &#8211; 4 week Goerli testnet will commence next week (c. March 20th). &#8211; Mainnet upgrade expected mid May.&mdash; Lido (@LidoFinance) <a href="https://twitter.com/LidoFinance/status/1635739571227951117?ref_src=twsrc%5Etfw">March 14, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



In the case of <a href="https://blockworks.co/tag/coinbase" target="_blank" rel="noreferrer noopener">Coinbase</a>, a centralized exchange that also provides staking services, withdrawal requests will be available 24 hours following the upgrade, the company <a href="https://twitter.com/coinbase/status/1636047279793528833">said</a> in a tweet. 



“All unstaking requests are processed on-chain, and we’ll pass the unstaked funds and staking rewards to you once released by the Ethereum protocol,” Coinbase <a href="https://twitter.com/coinbase/status/1636047279793528833">tweeted</a>.



The exchange is currently under scrutiny from the <a href="https://blockworks.co/tag/sec" target="_blank" rel="noreferrer noopener">SEC</a> after <a href="https://blockworks.co/news/sec-serves-coinbase-in-latest-alleged-crypto-securities-violation">receiving a Wells notice</a> over alleged security concerns.



Rocketpool, another decentralized Ethereum staking protocol, noted in a <a href="https://medium.com/rocket-pool/rocket-pool-atlas-upgrade-7c69e39a3d5f">blog post</a> earlier this month that staking withdrawals will likely be possible in time for Shanghai-Capella, following an upgrade dubbed Atlas, though specific dates have not yet been confirmed.



“We are targeting a mainnet Atlas release for end of March / early April,” RocketPool founder David Rugendyke said.



Stakewise has not provided clear documentation outlining dates of withdrawals but is estimated to be available following its “<a href="https://docs.stakewise.io/stakewise-pool">Phase 2</a>” plans.



“Upon arrival of Phase 2, StakeWise users will be able to burn sETH2 and rETH2 within the app and receive ETH in return at a 1:1 ratio,” the company <a href="https://docs.stakewise.io/stakewise-pool">said</a> in a blog post.&nbsp;



Similar to Stakewise, Frax has not detailed specific withdrawal dates. A representative for Frax was not immediately available for comment.



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Which ETH Staking Providers Will Be Ready for Withdrawals on Day 1?

Ethereum has completed its “Shapella” upgrade on Goerli, enabling withdrawals on the testnet before the mainnet hard fork <a href="https://blockworks.co/news/ethereum-developers-push-back-shanghai">planned for early April</a>.



The Shapella upgrade is the combination of the execution layer (Shanghai) with the consensus layer (Capella).



Developers have previously tested the upgrade on <a href="https://blockworks.co/news/ethereum-steps-towards-staking-withdrawals-with-successful-testnet-upgrade">public testnets Sepolia</a> and Zhejiang.&nbsp;



The successful hard fork on Goerli marks the completion of the final step before Ethereum validators are able to withdraw their locked ether from the beacon chain.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">15 epochs later, Goerli has finalized. There was nothing wrong with the Client software. We just had to get the offline operators to upgrade. It was a good stress test. On to the next one. Mainnet! <a href="https://t.co/s573n5pC9f">https://t.co/s573n5pC9f</a>&mdash; terence.eth (@terencechain) <a href="https://twitter.com/terencechain/status/1635793234046898177?ref_src=twsrc%5Etfw">March 15, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



According to information on beaconcha.in, <a href="https://goerli.beaconcha.in/validators/withdrawals" target="_blank" rel="noreferrer noopener">58,063</a> withdrawals have already been processed on the Goerli testnet, with <a href="https://goerli.beaconcha.in/validators/withdrawals" target="_blank" rel="noreferrer noopener">124,246.82 (fake) ETH</a> distributed.



Since moving from proof-of-work to proof-of-stake, the Ethereum network has required validators to lock in 32 ether (about $52,500) in order to participate in staking activities whilst accruing rewards.&nbsp;



This latest upgrade shows they are one step closer to accessing these funds.



Two types of withdrawals will be possible once the withdrawal hard fork is executed in the beacon chain.



The first will be partial withdrawals, where earned rewards — those in excess of 32 ETH — is withdrawn to an Ethereum address. Validators who execute partial withdrawals will be able to continue to participate in network activities.



Full withdrawals will also be possible via an exit. If the validator chooses to do so, they can withdraw the entirety of their 32 ether and earned rewards and enter an exit queue.



The Ethereum Foundation <a href="https://notes.ethereum.org/@launchpad/withdrawals-faq#Q-What-is-ShanghaiCapella" target="_blank" rel="noreferrer noopener">notes</a> that the size of the exit queue will vary depending on the size of the validator set in the network, to ensure that there is a limit rate of exit and entry into the beacon chain validator set.



However, <a href="https://www.blockworksresearch.com" target="_blank" rel="noreferrer noopener">Blockworks Research</a> analyst <a href="https://twitter.com/smyyguy" target="_blank" rel="noreferrer noopener">Dan Smith</a> expects most of the resulting <a href="https://blockworks.co/news/effect-ethereum-shanghai-upgrade-price">sell pressure to be limited to the first few days</a> following the mainnet rollout, and other analysts see the upgrade being <a href="https://blockworks.co/news/institutions-bullish-on-eth-price">perceived as a significant de-risking</a> for the Ethereum network.



Vance Spencer, co-founder at Framework Ventures, told Blockworks that a successful mainnet Shapella would be &#8220;really important&#8221; for any institutional players interested in jumping into the Ethereum ecosystem, but have so far been hesitant due to their inability to unstake ETH as it stands.



&#8220;It appears that things went smoothly yesterday with the Goerli Shapella upgrade, and withdrawals are now being processed on Goerli testnet without major hiccups,&#8221; Spencer said.



&#8220;While I’m optimistic about the schedule, I think we all have to remember that there’s still a month of testing left, and even if there are no significant problems, it&#8217;s also still possible that major service providers could also cause delays if they don’t think they’ll be ready in time.&#8221;



Updated March 15, 2023 at 3:45 pm ET: Added comment from Vance Spencer.



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Shapella Upgrade Brings Ethereum Closer to Long-awaited Withdrawals

David Canellis

Ethereum now commands two out of the top 10 market cap spots, after the premiere ETH staking derivative flipped Binance’s stablecoin earlier this week.



Lido Staked ETH (<a href="https://blockworks.co/price/steth" target="_blank" rel="noreferrer noopener">stETH</a>) is now worth more than $10 billion, per CoinGecko, eclipsing Binance USD (<a href="https://blockworks.co/price/busd" target="_blank" rel="noreferrer noopener">BUSD</a>), which now has only $8.4 billion in circulation.



BUSD had about double that at the start of the year, ranking it in seventh place, slightly behind XRP.&nbsp;



Its issuer <a href="https://blockworks.co/tag/paxos" target="_blank" rel="noreferrer noopener">Paxos</a> has faced compounding redemptions <a href="https://blockworks.co/news/sec-triggers-bank-run-on-busd">after a Wells notice from the SEC</a> claimed the stablecoin represents an unregistered securities offering.



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe class="wp-embedded-content" sandbox="allow-scripts" security="restricted" title="Interactive or visual content" src="https://flo.uri.sh/visualisation/13058294/embed#?secret=fwMsXAZGri" data-secret="fwMsXAZGri" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div><figcaption class="wp-element-caption">Click play to watch stETH flip BUSD and enter the top 10 | Chart by David Canellis</figcaption></figure>



Like other liquid staking providers, <a href="https://blockworks.co/tag/lido" target="_blank" rel="noreferrer noopener">Lido</a> allows ether holders to stake their ETH in return for a separate derivative token, stETH.&nbsp;



Staking directly to the <a href="https://blockworks.co/tag/ethereum" target="_blank" rel="noreferrer noopener">Ethereum</a> blockchain without services such as Lido requires 32 ETH ($56,500) to operate a staking validator node. All staked ether cannot be withdrawn until the <a href="https://blockworks.co/news/ethereum-developers-push-back-shanghai">network’s next big upgrade, Shanghai</a>, goes live next month.



StETH turns ETH staked via Lido into an immediately liquid asset, which can either be traded on crypto exchanges, lent out or used as collateral for loans across DeFi protocols.&nbsp;



The token is backed by ether locked in staking, but its price isn’t directly pegged; stETH has <a href="https://blockworks.co/news/signs-of-next-crypto-depegging">wavered from ETH parity</a> at times.



Lido also automatically pays stETH holders daily staking rewards passed down from the Ethereum blockchain. There’s currently just shy of 5.6 million ETH ($9.9 billion) staked inside Lido’s protocol (excluding interest), <a href="https://pro.nansen.ai/lido" target="_blank" rel="noreferrer noopener">according</a> to Nansen, up 150% from around 2.3 million ETH ($4.1 billion) one year ago. Etherscan <a href="https://etherscan.io/token/0xae7ab96520de3a18e5e111b5eaab095312d7fe84" target="_blank" rel="noreferrer noopener">shows</a> more than 171,000 wallet addresses hold stETH.



Meanwhile, ether dominance — which measures how much of the crypto market is ETH — hovers a touch under 20%, while bitcoin dominance is almost 46%.



<h2>Ether liquid staking derivatives find product-market fit&nbsp;</h2>



In any case, <a href="https://blockworks.co/news/liquid-staking-derivatives-shanghai-upgrade">ether staking derivatives like stETH have exploded in popularity</a> in recent months, making the best of the lengthy lockup periods associated with participating in Ethereum 2.0 consensus.



The earliest ETH stakers locked their tokens in the proof-of-stake Beacon Chain back in Nov. 2020, when ether was less than $450.&nbsp;



ETH has since rallied as much as 1,000%, reaching a high of $4,878 one year after the Beacon contract went live, before dropping 64% to under $1,800 today.



<figure class="wp-block-image"><img decoding="async" src="https://lh5.googleusercontent.com/oXaSNl5w-z9P1WXQ-l_zEsSF-8uFUhe5atstVnLvGCmguYdYFJPLfG8H-q1OyOhIrbNW-5YZgvIlTMrx37-rmKfWA6FyhsCNhQTjWud_rysR540HGHuGglZVLAFeYVIpteCluRMSFT8jvanOU3Y6wGg" alt=""/><figcaption class="wp-element-caption">ETH goes up and down, but the number of ETH staked in consensus can only increase (for now)</figcaption></figure>



More than 17.6 million ETH ($31.3 billion) has been staked, representing nearly 15% of the circulating supply overall.



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Ethereum Now Featured Twice in Crypto Top 10 — Thanks to Lido

Ethereum liquid staking solution Lido revealed its latest upgrade, V2, which will focus on a new staking router that will allow anyone to develop on-ramps for new node operators. Staked ether holders will also be able to withdraw from Lido at a 1:1 ratio.



Lido was designed to combat centralized staking platforms and simplify the process of running individual staking nodes — its staked ether (<a href="https://blockworks.co/price/steth" target="_blank" rel="noreferrer noopener">stETH</a>) was the first liquid staking derivative to be adopted by the mainstream and <a href="https://www.blockworksresearch.com/research/eth-liquid-staking-derivatives" target="_blank" rel="noreferrer noopener">continues</a> to be one of the most popular staking protocols.&nbsp;



Around <a href="https://lido.fi/ethereum" target="_blank" rel="noreferrer noopener">5.05 million</a> ETH is currently staked with Lido. Staked ether cannot be withdrawn from the Beacon chain until the <a href="https://blockworks.co/news/liquid-staking-derivatives-shanghai-upgrade">Shanghai hard fork</a>, which is anticipated to be executed in April.



Lido believes the implementation of its V2 upgrades will significantly improve the decentralization of its network and improve withdrawal processes ahead of Shanghai, making stETH a valuable asset on the Ethereum network.&nbsp;



<h2>Staking router</h2>



The staking router is one of the major protocol upgrades on Lido.&nbsp;



Lido currently uses a singular NodeOperatorsRegistery — where a DAO selects node operators and incorporates them into a smart contract.&nbsp;



This update will upgrade the operator registry at Lido by moving it into an extensible protocol through a modular infrastructure — architecturally shifting Lido toward an aggregator strategy to incorporate a more diverse validator set.



Anyone will have the ability to create “plugins” in the form of modules that would attach to the staking router, Isidoros Passadis, the master of validators, and a protocol developer at Lido who goes by Kadmil, told Blockworks. 



“This means that a variety of different types of validator pools could be more easily accessed by the Lido protocol, including ones that solo and community stakers have a large participation in, which would not only drastically increase the total number of node operators who participate in the Lido protocol but also the diversity of the validator setups,” Passadis said.



The staking router is designed to become the nucleus of the Lido platform — the center of collaboration for stakers, developers and node operators.&nbsp;



Each module in the staking router would consist of various node operators, including community stakers, professional organizations, and DAOs, just to name a few. These node operators will also be given more than one module to participate in — diversifying the operator base. 



Aside from this, the new staking router will also enable users to store keys on an layer-2 solution or off-chain.&nbsp;



This is because “managing node operators and validators on-chain require transactions which scale with the number of operators — either in quantity or size, i.e. how much data is being recorded per transaction — being able to leverage [layer-2s] would drastically reduce the cost basis of node operator and validator management,” Passadis said.



<h2>Withdrawals</h2>



Withdrawals will be another important feature of Lido’s V2 upgrade. This feature will allow Lido users to unstake their stETH and receive ETH at a 1:1 ratio for ether.&nbsp;&nbsp;



The Ethereum network is designed differently from other <a href="http://blockworks.co/proof-of-work-vs-proof-of-stake-whats-the-difference/">proof-of-stake networks</a>, which have fixed withdrawal periods for stakers, <a href="https://www.blockworksresearch.com/" target="_blank" rel="noreferrer noopener">Blockworks Research</a> analyst Westie noted in a <a href="https://twitter.com/WestieCapital/status/1613645213792366595" target="_blank" rel="noreferrer noopener">tweet</a>.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">The Shanghai upgrade for Ethereum is currently targeted for this March. This will enable staking withdrawals for the first time since people began staking their ETH in 2020. However, most people don&#39;t yet know how the exit queue works. I&#39;ll walk you through it step by step 🧵👇&mdash; Westie 🟪 (@WestieCapital) <a href="https://twitter.com/WestieCapital/status/1613645213792366595?ref_src=twsrc%5Etfw">January 12, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



​​On Ethereum, validators must exit through two different stages — join a queue and then begin the withdrawal period. For this reason, Lido will process withdrawals in three separate steps: request, fulfillment and claim.



In the “request” part of the process, users will lock their stETH and propose a withdrawal request. Once the protocol sources the ether to fulfill the request, the process will move to the second stage, “fulfillment.” In this second stage, the protocol will lock the ether and burn the stETH and then notify the user that their ETH is ready to be claimed.



Users can “claim” their ether at any time — although fulfillment time is currently uncertain, Lido predicts the best-case scenario for claiming will be roughly around a few hours — with the majority of requests being ready for “claim” in under a week.&nbsp;



To prepare for all types of events, Lido has also designed withdrawals to be possible in two different modes.&nbsp;



The first mode, and the default mode, is named “Turbo.” This will be a fast way of fulfilling withdrawals and is designed to automate the process around the validator and minimize delays.&nbsp;



The second mode is dubbed “Bunker” and will be used to process withdrawals under catastrophic circumstances. This will prevent any nefarious actors from taking advantage of stakers. 



Bunker mode prevents sophisticated stakers from avoiding the penalties by passing the losses to unsophisticated ones, Kadmil told Blockworks. 



“Under current conditions and the proposed design, to switch to the bunker mode Lido should experience simultaneous slashing of 600+ Lido validators,” Kadmil said. “That’s 6 times more simultaneous slashings than Ethereum has experienced, and no Lido validator has been slashed ever.”



<h2>Launch details</h2>



Security audits for Lido V2 will begin at the start of February, with signal snapshot votes on the upgrade planned for the end of this month. If V2 updates are approved, the first version of the testament will be deployed on Ethereum’s Goerli testnet at the start of March. 



“We’re excited to share the plan for Lido V2,&#8221; Kadmil said. &#8220;This Lido on Ethereum protocol upgrade makes the protocol feature complete by allowing stETH to ether withdrawals, and opens a path for more experiments and collaboration with Staking Router architecture.&#8221;



Updated Feb. 7, 2023 at 9:49 am ET: Added comments from Isidoros Passadis, the master of validators, and a protocol developer at Lido who goes by Kadmil.



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Lido Moves Ahead With V2 Upgrade as Shanghai Edges Closer

Shalini Nagarajan

<div id="highlights-block_63185147d614a" class="highlights">
 <ul>
 <li>Matrixport is a British Virgin Islands registered cryptoasset financial services provider</li>
 <li>Three Arrows Capital owed $3.5 billion to 27 crypto companies at the time of its bankruptcy</li>
 </ul>
 
</div>



Cryptocurrency hedge fund <a href="https://cms.blockworks.co/tag/3ac/" target="_blank" rel="noreferrer noopener">Three Arrows Capital</a> (3AC) declared <a href="https://cms.blockworks.co/3ac-files-for-bankruptcy-as-co-founders-location-unknown/" target="_blank" rel="noreferrer noopener">bankruptcy</a> two months ago, so it was eyebrow-raising when on-chain analytics firms reported Tuesday it was still executing relatively hefty transactions. Those initial reports turn out to be wrong.



On-chain data showed a <a href="https://etherscan.io/address/0x23237b849d0e6f392573ee6ae9e3b1256f058143" target="_blank" rel="noreferrer noopener">wallet</a> identified by on-chain analytics firm Nansen as belonging to 3AC withdrew a total of $45 million from deposits previously staked on Curve Finance and Convex Finance.&nbsp;



More specifically, the wallet removed about 20,945 staked ether ($33.3 million) from Curve. From Convex, it retrieved 2,421 wrapped ether ($4 million), 202.7 wrapped bitcoin ($4 million) and 4 million USDT, according to data from security firm PeckShield.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true"><a href="https://twitter.com/hashtag/PeckShieldAlert?src=hash&amp;ref_src=twsrc%5Etfw">#PeckShieldAlert</a> The address labeled as 3AC withdrew ~20,945 <a href="https://twitter.com/search?q=%24stETH&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$stETH</a> (~$33.3M) from Curve Finance and ~2,421 <a href="https://twitter.com/search?q=%24WETH&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$WETH</a> (~$4M), ~ 202.7 <a href="https://twitter.com/search?q=%24WBTC&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$WBTC</a> (~$4M) and ~4M <a href="https://twitter.com/search?q=%24USDT&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$USDT</a> from Convex Finance. <a href="https://t.co/8R3J0IFtP1">https://t.co/8R3J0IFtP1</a> <a href="https://t.co/WSZI1iR05X">pic.twitter.com/WSZI1iR05X</a>&mdash; PeckShieldAlert (@PeckShieldAlert) <a href="https://twitter.com/PeckShieldAlert/status/1567179464370712577?ref_src=twsrc%5Etfw">September 6, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



The labeling of 3AC’s wallet by Nansen did not make it a certainty. In response to skepticism over the firm’s labelling in the past, Nansen CEO Alex Svanevik remarked in June, “we can (but rarely) make mistakes — no-one is perfect.”



Blockworks contacted Nansen to gauge the reliability of the labeling in this case and learned this was one of those times. According to a Nansen spokesperson:



<blockquote class="wp-block-quote">&#8220;This wallet was labelled Three Arrows Capital (3AC) due to it receiving large amounts of crypto from another known 3AC wallet. After investigating further, we’ve confirmed it was a 3AC counterparty managing this wallet: Matrixport. We’ve updated the label to reflect this.&#8221;</blockquote>



Matrixport is a financial services platform for cryptoassets that includes trading, borrowing and lending, and staking products.



The purpose behind Tuesday’s withdrawals isn’t clear, but <a href="https://www.matrixport.com/about" target="_blank" rel="noreferrer noopener">the company</a> did confirm the wallet is theirs.



<blockquote class="wp-block-quote">&#8220;The Matrixport wallet activity is part of our routine operations and not related to 3AC,&#8221; Ross Gan, head of public relations told Blockworks.</blockquote>



One reason behind the move may be that stETH holders will be unable to redeem their tokens for ether until <a href="https://twitter.com/lidofinance/status/1536756940419784704?lang=en" target="_blank" rel="noreferrer noopener">at least six months</a> after the Merge, which is slated for <a href="https://cms.blockworks.co/ethereum-merge-countdown-at-t-20-days/" target="_blank" rel="noreferrer noopener">Sept. 15</a>.



A Twitter speculator <a href="https://twitter.com/jadid/status/1567163416795844616" target="_blank" rel="noreferrer noopener">suggested</a> that the withdrawal move shows big wallet holders plan to liquidate their ether in the period of heightened focus on Ethereum around the Merge. Crypto markets are broadly down, but ether has shown strength relative to bitcoin, remaining in a daily uptrend since Aug. 29.



3AC owed 27 crypto companies <a href="https://cms.blockworks.co/3ac-co-founders-used-funds-assets-for-50m-yacht-bungalows/" target="_blank" rel="noreferrer noopener">$3.5 billion</a> at the time of its bankruptcy, with its biggest creditor being crypto brokerage Genesis. Founders Su Zhu and Kyle Davies have mostly laid low in the months following their fund’s collapse, allegedly refusing to cooperate with the <a href="https://cms.blockworks.co/three-arrows-capital-ordered-into-liquidation-by-bvi-court-report/" target="_blank" rel="noreferrer noopener">court-appointed liquidator</a> Teneo that’s overseeing its liquidation.&nbsp;



Blockworks had reached out to restructuring firm Teneo, who declined to comment on the alleged withdrawals, saying that the restructuring firm is focused on advancing the liquidation process “in order to maximize asset recoveries on behalf of all creditors.”



“During this time, it would be inappropriate to comment on speculation surrounding transactions that may or may not relate to Three Arrows or the investigations that are underway,” a spokesperson told Blockworks.



3AC didn’t return a request for comment by press time.



This story was updated on Sept. 7 at 9:15 am ET with new information about the funds&#8217; origin, and on Sept. 8 at 3:12 am ET with comment from Matrixport.



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Withdrawal of $45M from Curve Finance, Convex, Was Not From 3AC, Nansen Says

Jack Kubinec

<div id="highlights-block_62d5947c1c48d" class="highlights">
 <ul>
 <li>The announcement comes days after Sept. 19 was announced as the target date for ETH’s Beacon Chain Merge</li>
 <li>“For Ethereum stakers, this means staking with lower fees and access to a new suite of DeFi applications to amplify yields,” Lido wrote</li>
 </ul>
 
</div>



As ether’s price surges in anticipation of its long-awaited “<a href="https://cms.blockworks.co/the-investors-guide-to-the-ethereum-merge/" target="_blank" rel="noreferrer noopener">Merge” to proof-of-stake validation</a>, staking protocol <a href="https://cms.blockworks.co/tag/lido/" target="_blank" rel="noreferrer noopener">Lido Finance</a> is scaling staked ether (stETH) to layer-2 Ethereum protocols. 



Lido said Monday it’s supporting a wrapped version of stETH, known as wstETH on layer-2s, a move the company believes will allow stETH to increase its market capitalization and usage, while reducing gas fees for investors.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">What does this mean? Lower gas fees + expanded DeFi ecosystem⚡️ Lido on L2 is not limited to a single network, but will unfold via an ongoing roadmap of L2 scaling solutions. The supported Lido On L2 networks will be announced soon.&mdash; Lido (@LidoFinance) <a href="https://twitter.com/LidoFinance/status/1549034820927655936?ref_src=twsrc%5Etfw">July 18, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Lido stETH investors receive staking rewards when they lock ether on the proof-of-stake Beacon Chain. ETH’s Beacon Chain Merge has been in the works since 2020, but, last week, Ethereum developers set Sept. 19 as their latest merge target.&nbsp;



Even after The Merge, stETH holders will have to wait six to 12 months to unlock tokens.



Staked ether can be exchanged on integrated DeFi protocols such as Curve, but stETH is not now compatible with layer-2s that do not support “rebasable” tokens that change value based on staking rewards.&nbsp;



WstETH gives stETH a fixed value, allowing the wrapped token to be traded on prominent layer-2s such as UniSwap, ArcX, 1inch and SushiSwap, according to Lido.



“If the theory plays out that ETH will become the settlement layer that is slower and more expensive for finality then most if not all transaction volume will eventually move to [layer-2s]. If that turns out to be true, Lido wants to make sure we are skating to where the puck is going,” a Lido representative told Blockworks in a statement.



The wstETH move comes a month after the Curve liquidity pool for stETH <a href="https://cms.blockworks.co/will-lido-staked-ether-trigger-the-next-big-crypto-crash/" target="_blank" rel="noreferrer noopener">nearly ran out of ether</a>, making it difficult for investors to exit positions.&nbsp;



The liquidity crunch caused the price of stETH to lose its traditional parity with ether, reaching a low of 0.93 ETH. One stETH is currently trading at 0.98 ETH, per CoinMarketCap.&nbsp;



“It’s possible that stETH:ETH exchange rates may be slightly shallower and more volatile in specific markets” in the short term, Lido said, adding that it expects its protocols to stabilize over time as layer-2s draw greater investment.



LDO, Lido’s DAO token, rallied over 130% in the past week. Prominent DeFi (decentralized finance) trading platform FTX <a href="https://twitter.com/FTX_Official/status/1549031235606888449?s=20&amp;t=lyWFwWvMF8mWE17n-7ZJKQ" target="_blank" rel="noreferrer noopener">said</a> LDO is slated to be listed on the exchange Tuesday.





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Lido Brings Staked Ether to Layer-2s

<div id="highlights-block_1b74c1d73c9f0ad738c7fe439099684d" class="highlights">
 <ul>
 <li>Aave- and Compound-based stablecoin rates launched on Voltz earlier last month</li>
 <li>Traders can de-risk their portfolio by &#8220;locking in&#8221; a fixed interest rate</li>
 </ul>
 
</div>



With Ethereum&#8217;s anticipated transition from proof-of-work to proof-of-stake <a href="https://cms.blockworks.co/ethereum-activates-grey-glacier-hard-fork-merge-likely-in-september/">expected to occur</a> in a few months, Voltz protocol is offering traders a new way to speculate returns with interest rate swaps (IRS).



The company announced today that staked ether from Lido (stETH) and Rocket Pool (rETH) will join its growing trading pool that currently comprises Aave- and Compound-based stablecoin rates. Each pool will have a liquidity provider margin cap of $1.5 million, and the amount will gradually increase over time.&nbsp;



In traditional finance (TradFi), an IRS involves two counterparties that agree to exchange future interest payments with each other. Traders acknowledge that they prefer each other&#8217;s interest rates and enter a contract to switch future interest payments.&nbsp;



An IRS can be used to speculate, manage credit risks and hedge against losses — it is a necessary tool for many everyday financial services. Voltz aims to offer IRS services for DeFi trading, which is known to be volatile in nature.&nbsp;



“What interest rate swaps unlock at the most macro level is it provides an ability to transition from something that&#8217;s variable, to something that&#8217;s stable,” Simon Jones, CEO of Voltz, told Blockworks.



Voltz is an automated market maker (AMM) designed to simulate IRS on the blockchain, making it synthetic and adaptable to new pools and assets — this will likely allow for a wide range of financial products and trading strategies to be built on the protocol.



“When The Merge occurs, the rates of return a validator node generates are going to change, and that is going to translate into a change in the value of [ether],” Jones said. “What we’re doing by launching these pools is enabling people to take specific views and to start trading those market views in a synthetic way.”



Presently, IRS operations are limited. Other than Voltz, only a few other protocols are in the IRS space, including: Element Fi, Strips, Pendle, Tempus and Swivel, all of which are still very new to DeFi (decentralized finance).



For Jones, the relatively untapped market of IRS protocols serves as a great opportunity for his team to design a product that is “actually providing fundamental value.”



“One of the big design decisions we made was to make the protocol as composable as possible. Everything is on-chain, which enables us to be a super low-level primitive that a lot of products are built on top,” Jones said. “If you believe a portion of rates trading will go through smart contract-based markets in the future, the long-term opportunity for Voltz is to displace all of the trading activity in interest rate swaps that takes place even in traditional finance.”



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Interest Rate Swap Protocol Voltz Onboards Lido and Rocket Pool

<div id="highlights-block_62b490a343898" class="highlights">
 <ul>
 <li>Lido staked ether has caused a liquidity crisis in the crypto market</li>
 <li>User funds will remain safe unless stETH sells at 15% discount, Instadapp founder Samyak Jain said</li>
 </ul>
 
</div>



Instadapp, a smart wallet built on top of popular DeFi projects such as Uniswap and Maker, is designed to help manage assets for users with little financial or technical background. But in addition to smart contract risk, the ongoing instability in the price of Lido staked ether (stETH) has the potential to wreak havoc.



The company launched Instadapp Lite in March, a platform that allows its users to earn interest by depositing funds into strategy vaults, including swapping ether for stETH. The strategy currently earns a projected 7.79% annualized yield, by applying leverage.



While stETH was expected to trade at the same price as ether, it is not pegged to it and in fact has recently traded at a discount. Ordinarily that’s not a problem, and funds in Instadapp’s vault will remain safe unless stETH diverges in value relative to ETH by -15%, Samyak Jain, founder of Instadapp, said during a Wednesday <a href="https://twitter.com/MakerDAO/status/1538914358469742593" target="_blank" rel="noreferrer noopener">Twitter spaces</a> interview with MakerDAO.



So far, stETH has remained no more than about -7% relative to ETH, but the gap is wide enough to <a href="https://cms.blockworks.co/will-lido-staked-ether-trigger-the-next-big-crypto-crash/" target="_blank" rel="noreferrer noopener">cause fears</a> of a liquidity crisis in the crypto market. As of Thursday at 11:00 am ET, each stETH trades at about 0.95 ETH.



After TerraUSD (UST) <a href="https://cms.blockworks.co/?s=Terra" target="_blank" rel="noreferrer noopener">collapsed</a> in May, setting off a broad market decline, demand for stETH dropped substantially as investors seeking liquid assets rushed to sell. That placed significant pressure on liquidity pools where stETH is traded, chiefly the Curve decentralized exchange.



The crux of the problem is that once stETH is minted, it cannot be redeemed until after both <a href="https://cms.blockworks.co/?s=the+Merge" target="_blank" rel="noreferrer noopener">the Merge</a> — when the Ethereum blockchain migrates from proof-of-work to proof-of-stake — and a further upgrade that will enable withdrawals expected in the second quarter of 2023. While stETH itself is fully liquid, the ETH backing it is not, and the market therefore applies a discount.



The Lido DAO which administers stETH has tried to mitigate risks by increasing short-term rewards in its LDO governance token tokens.



“The most [Lido] can do is create awareness and provide rewards so that users are willing to buy more stETH in the current market situation,” Jain said. Until then, the stETH price divergence remains a risk.



Despite his concerns, Jain remains optimistic that the price of stETH will recover once the market stabilizes, stating in a <a href="https://blog.instadapp.io/usdc-strategy" target="_blank" rel="noreferrer noopener">blog post</a> that “almost all my ETH holdings are in the form of Lido Staked ETH.”



A second vault in Instadapp Lite generates additional yield by betting on the future price of stETH but allows users to deposit and withdraw in USD Coin (USDC), a stablecoin pegged to the US dollar.



This approach uses the first stETH strategy, by borrowing ETH using USDC as collateral in the Aave money market protocol and buying stETH. The stETH is then supplied to Aave and used to borrow an equal amount of ETH, which is sold back to USDC, and also supplied to Aave. This limits directional price risk on ETH, and uses ETH staking rewards converted back to USDC to generate interest.



“You are able to capitalize on the current market inefficiency by first building a capital allotment, in this case using USDC. [You can utilize] that capital to borrow in ETH and buy stETH at a discounted rate which you can immediately cash out,” he said.



If stETH returns to par with ETH, you can close the position and pocket the extra profits, Jain said.



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<hr class="wp-block-separator">

Continued StETH Weakness Could Spell Trouble for Instadapp Lite Users

<div id="highlights-block_62ac9bb3f01d7" class="highlights">
 
</div>


<div id="highlights-block_62ac9c778463f" class="highlights">
 <ul>
 <li>The majority of stakers on Lido are on Ethereum, but LDO holders possess governance power over other chains</li>
 <li>Lido hosted a conversation about the proposal on Twitter Spaces</li>
 </ul>
 
</div>



The DAO overseeing Lido, the largest provider of staking services for Ethereum, has proposed a switch up of its governing system to “reduce the existing scope of governance” for its token holders.



Lido DAO, a decentralized autonomous organization, is governed by the holders of the DAO’s governance token, LDO — holders participate in transparent on-chain voting to decide on platform parameters and proposals.&nbsp;



Although the Lido DAO is currently deployed on Ethereum, LDO holders possess governance power over liquid staking protocols on other chains, including Polygon and Solana.



Under the DAO&#8217;s current multichain governance system, LDO holders have incentives related to other chains, which are “not necessarily aligned with those of Ethereum network participants,” Sam Kozin, lead smart contract developer at Lido, wrote in a <a href="https://research.lido.fi/t/ldo-steth-dual-governance/2382" target="_blank" rel="noreferrer noopener">blog post</a>.&nbsp;



To solve this problem, the Lido team has proposed a dual governance solution that sits between LDO holders and stakers. The proposal will introduce “a dispute and resolution mechanism for misaligned incentives between stakers and LDO holders.”&nbsp;



“This [resolution] mechanism is designed to be triggered when LDO governance becomes captured as a result of attacks or misaligned with stakers and the network, because this mechanism allows two stakers to block governance decisions, it has the effect of disincentivizing LDO governance from executing decisions that go against the stakers interests,” Kozin said during a Twitter spaces event on Thursday, held to discuss the dual governance proposal.



During the general decline in the crypto market, Lido’s staked ethereum (stETH) tokens have <a href="https://cms.blockworks.co/will-lido-staked-ether-trigger-the-next-big-crypto-crash/" target="_blank" rel="noreferrer noopener">been losing value</a>, relative to ether, and this split has contributed to a liquidity squeeze in the crypto market. Although each stETH token is fully backed by ether locked in Ethereum’s Beacon Chain, stETH will not be redeemable for ether on a 1:1 basis until after the blockchain’s <a href="https://cms.blockworks.co/shadow-forks-and-testnets-the-ethereum-merge-approaches/" target="_blank" rel="noreferrer noopener">Merge</a> and a subsequent network upgrade to enable withdrawals projected to occur sometime in 2023. As a result, stETH is trading below 0.94 ETH per token as of Friday at 8:00 am ET, exacerbated by heavy selling from <a href="https://cms.blockworks.co/blockfi-says-it-liquidated-a-large-client-amid-3acs-margin-calls/" target="_blank" rel="noreferrer noopener">struggling</a> crypto hedge fund firm Three Arrows Capital.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">people think Celsius is the biggest stETH dumper but its 3AC and it isnt relatively close, they are dumping on every account and seed round address they have, most looks like its going to payback debts and outstanding borrows they have <a href="https://t.co/9bZnmTXQzj">pic.twitter.com/9bZnmTXQzj</a>&mdash; moon (@MoonOverlord) <a href="https://twitter.com/MoonOverlord/status/1536697618797142016?ref_src=twsrc%5Etfw">June 14, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Hasu, a prominent though pseudonymous blockchain researcher and strategic adviser to Lido, believes that for the protocol to grow and capture more revenue, “the community, the team developers need to trust that Lido isn’t something that will harm Ethereum.”



“The more governance power you have in your protocol, the more the governance and participants are incentivized to exploit and extract money from it by doing something that&#8217;s against the protocol,” Hasu said. “Less governance will make it easier for people to trust us and will save us a lot of money.”



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<hr class="wp-block-separator">

Lido DAO Proposes Governance Switch Up

<div id="highlights-block_62a7367176888" class="highlights">
 <ul>
 <li>People are selling their stETH tokens, causing liquidity problems</li>
 <li>For the time being, Celsius has suspended all withdrawals and transfers</li>
 </ul>
 
</div>



Lido’s crypto derivative representing staked ether (<a href="https://cms.blockworks.co/wheres-the-liquidity-crypto-lending-explained/#Liquid-Staking">stETH</a>) has slipped by roughly 6% compared to ether in the <a href="https://dune.com/dataalways/stETH-De-Peg" target="_blank" rel="noreferrer noopener">past 72 hours</a>, causing concern there could be another big crypto crash similar to last month’s collapse of LUNA.&nbsp;



<a href="https://cms.blockworks.co/wheres-the-liquidity-crypto-lending-explained/#Liquid-Staking">StETH is a token stand-in</a> for ether locked inside staking protocol Lido. The digital asset effectively constitutes the deposited ETH while Lido distributes associated staking rewards to its users. StETH tokens are minted when ether is deposited and burned upon redemption.&nbsp;



StETH has historically been considered a safe asset, effectively pegged 1:1 to ether and backed by ETH in Ethereum’s Beacon Chain, which has been running since December 2020.&nbsp;



StETH has been used as <a href="https://cms.blockworks.co/wheres-the-liquidity-crypto-lending-explained/#Crypto-Collateral">collateral</a> on open-source liquidity protocol Aave since March, allowing those who stake ether in support of Ethereum’s switch to proof-of-stake to gain leverage on their locked crypto.



Due to current market volatility, users are rushing to cash out their ETH from the Curve pool, a decentralized exchange liquidity pool on Ethereum designed for stablecoin trading. As a result, stETH is now harder to cash out than ETH – leading to de-pegging.&nbsp;



But unlike stablecoins with redemption mechanisms, stETH can only be unlocked on Ethereum’s proof-of-stake chain (once it goes live). The token is more akin to a liquid interest-bearing digital asset.&nbsp;



As such, stETH’s value cannot truly be equal with ETH due to associated risks with the impending <a href="https://cms.blockworks.co/shadow-forks-and-testnets-the-ethereum-merge-approaches/" target="_blank" rel="noreferrer noopener">Ethereum merge</a>, including delays and cancellations. When liquidity dries up in any market, the price of the associated asset will also dip.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Staked ETH issued by Lido is backed 1:1 with ETH staking deposits. The exchange rate between stETH:ETH does not reflect the underlying backing of your staked ETH, but rather a fluctuating secondary market price.&mdash; Lido (@LidoFinance) <a href="https://twitter.com/LidoFinance/status/1535184472546889735?ref_src=twsrc%5Etfw">June 10, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Despite stETH’s recent drop from ETH parity, positive signs indicate it’s becoming less risky to own; the Ethereum Ropsten testnet <a href="https://cms.blockworks.co/ethereum-ropsten-testnet-successfully-merged-to-proof-of-stake/" target="_blank" rel="noreferrer noopener">successfully</a> moved to proof-of-stake last week.&nbsp;



Still, stETH has become a problem for some of its largest holders – including Celsius, a crypto lending platform where over&nbsp;<a href="https://www.linkedin.com/posts/petehuang_blockchain-crypto-web3-activity-6941378981409542144-1F1L/" target="_blank" rel="noreferrer noopener">$3.8 billion</a> has been deposited.



Celsius yesterday <a href="https://cms.blockworks.co/celsius-lending-platform-suspends-withdrawals-and-transfers/" target="_blank" rel="noreferrer noopener">suspended</a> all withdrawals and transfers. Despite recovering strongly this morning, Celsius’ own native CEL token is down about 60% over the past week and had fallen 34% in the past 24 hours, as of press time. It is currently down more than 96% from its early-June all time high.



Liquidity protocol Aave is now urging its community members to consider pausing the stETH market and halting ETH borrows “as an extra precaution.”



“Our risk monitoring system continues to measure risk in AAVE,” <a href="https://governance.aave.com/t/staked-eth-and-aave-risk-june-11th-update/8469" target="_blank" rel="noreferrer noopener">said</a> John Morrow, chief operating officer at Gauntlet, which performs risk assessments for the staking protocol. “As governance proposals take a few days to pass and go into effect, we are encouraging the community to consider the impact of the…changes carefully. If market conditions worsen we will strongly recommend that these actions be taken immediately.”



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Correction: Over $3.8 billion has been deposited with Celsius, not $3.8 billion worth of stETH. Updated June 13, 2022 at 6:11 pm ET.




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