In May, market conditions led to a deviation between the prices of Lido Staked Ether (stETH) and Ether (ETH). Since stETH is the core component of Interest Compounding ETH Index (icETH), this resulted in an impact on the price of icETH. While less ideal in the short term, the lower price of icETH does provide a potential arbitrage opportunity.

This article will help you understand the current pricing of icETH as well as potential future scenarios.

Why is icETH currently priced at a discount?

So why is icETH at a discount? While the difference between stETH and ETH has stabilized, icETH’s price continues to be lower than ETH. This difference in price can be attributed to a couple of things:

• åIn order to secure funds, some of icETH’s underlying holdings were traded for wrapped ETH. This automated deleveraging of icETH created a small loss of *~.5% in NAV (Net Asset Value)decay.

• The difference between the price of stETH & ETH times the leverage ratio; ex. 1 ETH ($1900) - 1 stETH ($1875) * 2.89 = $72.25 or a price for icETH of $1827.75

*Note the realized NAV decay due to rebalancing has been earned back by the product already. Net yield for icETH has gone up and is currently earning 2 basis points/day in net yield.

Later this year, Ethereum will move from a blockchain that uses proof of work to one that uses proof of stake. This switch in consensus mechanism is collectively known as “the merge”. After the merge, 1 stETH will be redeemable for 1 ETH. Until then, the rewards associated with staking will boost the price of icETH, and it’s possible that the price of icETH surpasses that of ETH.

I bought when icETH and ETH were 1:1, what happens if I keep holding icETH?

Aside from a small amount of NAV decay, you have not incurred any major losses. The product’s risk automation helped keep your funds safe amidst extreme volatility, and icETH continues to earn staking rewards. The majority of the price difference you’re seeing is related to the difference in price between stETH and ETH. In the near future, we expect stETH and ETH to be trading 1:1 rather than the current ratio of .9833:1.

As the merge approaches, some experts expect that stETH, and therefore icETH, will increase in value and come in line with the ETH price. It is also possible that stETH staking revenue increases after the merge and will receive increased rewards that grow the value of icETH to surpass ETH.

I bought when icETH and ETH were 1:1, what happens if I sell?

The best route to sell icETH is to go through our site. You’ll get low slippage through secondary liquidity on Uni V3 as well as flash minting through Curve stETH-ETH pool (confirm where flash minting is enabled and slippage here with peg).

Just be aware that selling before the merge will lock in the price differential between icETH and ETH.

What are the opportunities and risks of buying icETH now?

In the medium term, we expect stETH and ETH to be trading 1:1. Because of this, the current price differential could provide an opportunity to obtain a discount on stETH. As the merge comes closer, some experts believe that stETH, and therefore icETH, will increase in value and come in line with the ETH price. It is also possible that stETH staking revenue increases after the merge and will receive increased rewards that grow the value of icETH to surpass ETH.

As we've previously experienced (and may again in the future), the price of icETH can decrease as large holders sell off their stETH positions. During these events, some may proclaim a doomsday scenario on Twitter & those who don't believe in the long-term value of ETH or the upcoming merge may panic sell.

During these events, icETH can incur additional NAV decay as the product undergoes rebalances to maintain a healthy leverage ratio.

Like any DeFi or leveraged product, there are risks to be aware of before purchasing. The events in May were a test of the smart contract safeguards we built into icETH and it was able to keep funds safe despite volatile market conditions.

Disclaimer: This content is for informational purposes only and should not be construed as legal, tax, investment, financial, or other advice.

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