# wstETH - Yield Nest Collateral Risk Brief

## Market Liquidity

As the market leader in the LST market, stETH and wsETH are widely available across DEXes such as Curve, Uniswap, Balancer, Pancake swap and Sushiswap. Liquidity on CEXes is equally diverse with availability on MEXC, Binance, Huobi, Crypto[dot]com, Coinbase and HitBTC among others. Multiple pools exist for liquidation on and off chain, according to [DexGuru](https://dex.guru/liquidity/token/eth/0x7f39c581f595b53c5cb19bd0b3f8da6c935e2ca0) over a 30 day period (7/28/2024 - 8/28/2024) 7 DEX pools have had over $1M in liquidity. A >1% slippage would require an estimated swap size of $143.75M (47.3K stETH).

Additionally, stETH is utilized extensively across multiple leading DeFi protocols as collateral, including Aave, Compound and Maker.

## Token Volatility
The liquid staking basis (price difference between stETH and ETH) has been relatively stable averaging -0.03% over a 90 day period, not deviating significantly and has remained close to ETH with a LSB range between -0.0024% and 0.0025%. [Significant depeg events](https://www.nansen.ai/research/on-chain-forensics-demystifying-steth-depeg) have occurred in the past before withdrawals were enabled.

Source: [Coingecko Historical Data](https://www.coingecko.com/en/coins/lido-staked-ether/historical_data) | 5/28/2024 - 8/26/2024

## Smart Contracts

Lido contracts are upgradeable via proxy contracts, upgrades and protocol parameters are controlled by the DAO. Extensive audits have been carried out on the Lido V2 codebase since 2023 by various auditing firms, including by Oxorio, Statemind, Hexens, MixBytes, and Certora. Recent audits, by [Chain Security](https://github.com/lidofinance/audits/blob/main/ChainSecurity%20Code%20Assessment%20of%20LIP-23%20Negative%20Rebase%20Checks%20Smart%20Contracts%2006-24.pdf) and [MixBytes](https://github.com/lidofinance/audits/blob/main/Lido%20Sanity%20Checker%20Security%20Audit%20Report.pdf), found 2 low severity risks and 8 low severity risks respectively that were either resolved or acknowledged.

## External Factors/Dependencies

Lido’s requires independent oracle daemons to sync the system periodically to communicate between Ethereum’s Consensus layer and Execution layer. In case of no finality on the Consensus Layer, Lido's oracle daemons may stop pushing regular updates (set to 225 epochs or 1 day), preventing rebases from taking place. If sanity checks fail (on max APR or total staked amount drop), this could cause significant disruptions in Lido’s operations, including incorrect distribution of rewards and liquidity mismanagement.

Lido has a reliable Chainlink pricefeed oracle available for both stETH/ETH and stETH/USD pairs.

## Centralization Vectors

Contract upgrades and critical parameters are governed by the DAO i.e. LDO token holders. Looking at LDO’s [distribution](https://etherscan.io/token/tokenholderchart/0x5a98fcbea516cf06857215779fd812ca3bef1b32), no single non-contract address holds more than 10% of the total supply.

A number of multisigs are used with limited privileges, either as an emergency backstop or as precautionary measures. For example the [Deposit Security Committee multisig](https://etherscan.io/address/0xC77F8768774E1c9244BEed705C4354f2113CFc09), allows any guardian to call pauseDeposits() in case of suspicious activity related to user deposits sent to the beacon chain.

## Legal Status

Lido DAO is depicted as a Decentralised Autonomous Organisation, with LDO toke holders governing the liquid staking protocol by deciding on key parameters. While the exact details of the legal structure are not publicly disclosed, it's safe to assume that Lido has chosen the Cayman Islands based on references in the [Terms of Use](https://lido.fi/terms-of-use).

It is unclear how an enforcement action might be carried out against a DAO. A potential centralization risk is from the large proportion of Node Operators in Europe (60% of ETH staked in Lido), which increases the network's risk exposure to regulatory action in those jurisdictions.

## Conclusion

Overall stETH represents the keystone LST, with liquidity, volatility and contract risk profiles among the most favorable in the market. Prior

The uncertain enforcement and regulation factors should be noted considering Lidos TVL dominance and subsequent ripple effects to the wider market. This however is a more general market risk not solely applicable to Lido.