Depeg

Depeg definition

A depeg is when an asset built to track a reference price trades meaningfully away from that price. Plenty of on-chain assets are built to track something else. USDC, USDT, and DAI target one dollar. Liquid staking tokens such as stETH and wstETH track staked ETH. Liquid restaking tokens such as rsETH and weETH track staked and restaked ETH. Wrapped assets such as wBTC track BTC. The peg is held in place by some combination of redemption rights, collateral backing, and arbitrage.

While the market price sits away from that reference, the asset is depegged. Deviations of a few basis points happen every day and mean nothing. A depeg event means a move large enough to change collateral values, drain liquidity, or make people question the thing behind the token.

What causes a depeg

Three causes cover almost every case: doubt about the backing (reserve solvency, custodian or bank risk), redemption stress (everyone trying to exit through a door that only fits so many people per day), and market structure (thin liquidity, a lopsided AMM pool, an oracle that lags or leads the market). Once a peg starts to slip, lending protocols amplify the move: the oracle updates, positions collateralized by the asset go underwater, liquidations sell more of it into a market that is already one sided.

LST and LRT depegs (stETH, wstETH, rsETH, weETH)

This is where most of the confusion lives, and it is worth being precise. A liquid staking token is a receipt for ETH locked in a validator. stETH is the Lido version and wstETH is the same claim with the daily rebase folded into an exchange rate instead of a growing balance. Liquid restaking tokens such as rsETH from Kelp and weETH from ether.fi are the same idea with a restaking layer stacked on top.

The thing to internalise is that none of these are redeemable on demand. Redeeming stETH means submitting a request to the Lido withdrawal queue, waiting for an oracle report to finalize it, then claiming. How long that takes depends on the size of the queue and on the exit queue of the Ethereum beacon chain, and the Ethereum documentation is blunt about the second part: exiting a validator takes variable amounts of time depending on how many others are exiting at the same time. Lido itself warns integrators that holders risk an exchange price for stTokens lower than the inherent value because of these withdrawal restrictions.

So the ETH price you see for an LST on a DEX is not a redemption price. It is a secondary market price, and what it really quotes is the cost of skipping the queue. When nobody is in a hurry, that convenience is worth close to nothing and the token trades within a hair of its underlying rate. When everyone wants out at once, sellers hit the same pools, buyers demand compensation for parking ETH in a queue of unknown length, and the discount widens. Nothing has broken. The exit is rationed by time and the market is putting a price on time.

wstETH is not a separate peg to watch. It trades at the stETH price multiplied by the wstETH exchange rate, so a wstETH discount is a stETH discount wearing a different label.

The reference episode is June 2022. There was no redemption path at all back then: staked ETH withdrawals did not exist until the Shanghai and Capella upgrade shipped on April 12, 2023, so stETH could not be turned back into ETH by anyone, at any price, through the protocol. The only exit was the open market. stETH had been trading 2% to 3% below ETH for months, spiked to 5% in May, and when Celsius and Three Arrows Capital became forced sellers into a market whose daily volume was a rounding error next to ETH, the discount hit a record of about 8% on June 13, 2022. Withdrawals have existed since 2023, which is exactly why discounts since then have been shallower and shorter lived.

Restaking tokens sit one layer further out, and each layer is another thing between the token in your wallet and the ETH at the bottom.

• The beacon chain exit queue, exactly as for a plain LST.
• The restaking layer has its own unbonding delay on top, before the stake is free to move.
• Slashing conditions from the services the restaked ETH secures, on top of ordinary validator slashing.
• Thinner secondary liquidity than stETH, so the same size of forced selling pushes the price further.
• More contracts and more operators in the path, which is more surface for something to go wrong.

A stablecoin depeg and an LST discount are not the same event

They look identical on a chart and they are completely different problems. This distinction is the single most useful thing to take away from this page.

A stablecoin peg is a claim on reserves. USDC at one dollar is a promise that an issuer holds a dollar of assets you can redeem. When that promise is questioned, the token trades below par until the question is answered. March 2023 is the textbook case: Circle disclosed that 3.3 billion dollars of USDC reserves, about 8% of the total, sat at Silicon Valley Bank. USDC traded below one dollar until Circle confirmed the deposit would be fully available when US banks opened and reaffirmed that USDC remained redeemable one for one, at which point the gap closed. What the market was pricing was solvency.

An LST peg is not a claim on reserves. stETH is not a company promising to hand you a dollar of something. It represents ETH that demonstrably exists and is staked, verifiable on-chain. What you do not get is the ETH right now. So an LST discount is a queue and liquidity phenomenon, not a solvency one, and it resolves differently: it closes as the queue drains, not when someone publishes an attestation.

• Stablecoin depeg: the question is whether the backing exists and can be redeemed. It resolves through disclosure, redemptions reopening, or the issuer failing.
• LST or LRT discount: the backing is on-chain and verifiable. The question is how long until you can claim it. It widens when everyone queues at once and closes as the queue clears.
• The recovery path is different, so the right response is different. One is a credit question, the other is a duration question.

None of which is a licence to shrug at an LST discount. If you borrowed against wstETH, the liquidation engine has no opinion about queue mechanics. It reads a price.

Why it matters to your positions

If you hold a stablecoin as collateral or owe one as debt, a depeg rewrites your position math in seconds. If you hold an LST as collateral, a discount against ETH can liquidate a leveraged staking loop even though nothing whatsoever happened to ETH.

• Collateral depegging can push health factor below 1 with no move in the underlying asset.
• A depeg in the asset you borrowed briefly shrinks the real value of the debt, and usually rebounds.
• Liquidity thins out exactly when you want to exit, so the slippage bill arrives on top of the price move.
• LP positions on stable to stable or LST to ETH pairs bleed through impermanent loss while the gap is open.
• Leverage loops built on the correlation between two assets are the first thing to break when that correlation slips.

Soft depeg vs hard depeg

Not every deviation is a problem. A soft depeg of 10 to 30 basis points usually reflects redemption friction or a temporary inventory imbalance in an AMM pool. A hard depeg of 100 basis points or more usually implies real doubt and tends to feed on itself. Duration matters as much as depth: a one block wick on a thin pool is noise, a 50 basis point gap that holds for hours on a deep venue is information. Any monitoring worth having therefore needs both a threshold and a duration.

The oracle layer

Lending protocols do not necessarily see the price you see. Aave prices assets with Chainlink feeds plus a Correlated Assets Price Oracle for assets tightly correlated with an underlying, covering LSTs such as wstETH, rsETH, and weETH with growth rate caps, and stablecoins such as USDC and USDT with a fixed maximum price (for instance a cap of 1.04 dollars for a 4% ceiling).

The asymmetry is the part to remember: these caps limit upside only, and downward moves pass straight through. An asset trading above its cap will be valued at the cap inside the protocol, while a depeg downward flows directly into your collateral value and your health factor the moment the feed updates. Knowing how your collateral is priced is part of knowing your depeg risk.

How Otomato monitors depegs

Paste a wallet address and Otomato detects the pegged assets you actually hold, stablecoins, LSTs, LRTs, and wrapped assets, then follows each one against its reference. When a deviation crosses a threshold and holds, you get an alert on Telegram or in the mobile app that names the asset, the size of the gap, and the positions exposed to it. Read-only: no wallet connect, no signatures, and Otomato cannot move funds.

Monitor this in your portfolio

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