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Curve Finance’s stETH/ETH Pool Imbalance Can Be an Opportunity to Earn ETH Staking Rewards.

Image Source: Twitter (@CurveFinance)

Curve Finance is an Automated market maker platform offering an efficient way to exchange tokens. It maintains the lower fees for the liquidity providers by accommodating the liquidity pools made of similar assets, such as stablecoins. The imbalance in the stETH-ETH pool of Curve Finance has been quite in talks for few days. The pool has reserves of 340,472.34 ETH (31.70%) and 733,655.65 stETH (68.30%).

On the curve, the stETH/ETH pool is the biggest, with more than $1.5 billion liquidity making the stETH one of the most liquid tokens. The pool is incentivized, and hence to more the price by 2%, one needs to trade 175,000 stETH to ETH. 

The reason for imbalance:

It is noticed that the imbalance in stETH/ETH pool is due to two reasons. One is the cyclical abuse of the Lido referral program, where some users tried to exploit the program by staking with Lido. They receive their referral rewards and then sell their stETH into Curve Pool, which increases the imbalance gradually.

The second reason for the increased imbalance is the growth in Arbitrum yield farms, leading to more attractive ETH yields.

Let’s discuss what has been done to remove the concern:

The team has made many fundamental changes to the referral program to prevent such exploitation. The platform will now implement the whitelisted approach where only approved partners will be able to receive the rewards.

To rebalance the pool, ETH merge approach is implemented where the stETH can be redeemed 1:1 for the staked ETH without requiring any external market pools. The exciting thing is that this imbalance can be an excellent opportunity to earn ETH staking rewards due to the ETH merge.

Currently, the market participants farm the stETH/ETH pool with $1.7 billion and get around 10% APR in exchange. It means that 10% APR is an acceptable reward ratio for them, including the curve risk and stETH risk. With the merge and withdrawals expected within one year, this 10% APR on ETH can be obtained by buying stETH with a discount of 3 to 7%.

Closing thoughts

The increase in imbalance is not of much concern because the pool still contains a healthy amount of stETH. With the completion of the ETH merge, where stETH can be redeemed with ETH in the ratio of 1:1, this imbalance is a very attractive opportunity to earn staking rewards at a discounted price.