November 2022 marked a turning point in the crypto industry as the dramatic collapse of FTX, one of the world’s largest cryptocurrency exchanges, sent shockwaves throughout global markets. Beyond the immediate liquidity crunch and a sharp decline in asset values, a more nuanced and equally significant consequence was the short-term depegging of stETH—a widely used liquid staking token issued by Lido Finance.

This event has led to a critical reassessment of the risks associated with staking derivatives, previously viewed as a safer yield-generating tool in the decentralized finance (DeFi) landscape.

FTX Fallout Triggers Massive Market Disruption

The FTX crisis unfolded rapidly in early November 2022, after revelations of a multibillion-dollar shortfall in user funds. The resulting panic led to over $6 billion in withdrawal requests within 72 hours, freezing assets and sending the exchange into a death spiral. By mid-November, FTX filed for Chapter 11 bankruptcy protection.

This collapse wiped out billions in market capitalization across the crypto space and ignited a chain reaction of liquidity stress that rippled through various protocols, funds, and decentralized ecosystems.

stETH Depegging: A Hidden Risk Exposed

During this turmoil, one of the more subtle but critical events was the temporary depegging of stETH (staked Ether) from ETH. Traditionally, stETH maintains near parity with ETH as it represents ETH staked on Ethereum’s Beacon Chain, allowing users to maintain liquidity while earning staking rewards.

However, amid the FTX-triggered chaos, stETH briefly traded at a 4–6% discount to ETH, marking its largest depeg since the Terra collapse. While the peg was quickly restored, the event highlighted systemic vulnerabilities in liquid staking markets.

Why Did stETH Depeg?

Several factors contributed to the stETH depeg:

• Liquidity Constraints: In times of panic, traders and funds sought to liquidate positions quickly, including staking derivatives. The liquidity pool for stETH/ETH was insufficient to absorb the sell pressure.

• Confidence Shock: As centralized platforms like FTX collapsed, investor trust in crypto instruments—including staking derivatives—was significantly shaken.

• Arbitrage Delay: Arbitrageurs were slow to restore the peg due to heightened gas fees and market inefficiencies during the period of extreme volatility.

Rethinking Staking Derivative Risks

Prior to the FTX crash, liquid staking protocols were touted as efficient tools for boosting capital efficiency in DeFi. stETH, rETH, and other derivatives allowed users to stake while retaining access to liquidity and yield strategies.

But the November depeg illustrated several core risks:

• Liquidity Mismatch: The underlying staked ETH is locked until Ethereum's full withdrawal mechanism is activated, making stETH only as liquid as market conditions allow.

• Smart Contract Risk: Like all DeFi protocols, staking derivatives are subject to bugs or exploits in smart contracts.

• Market Dependency: The health of staking tokens is closely tied to centralized market sentiment and infrastructure, as shown in FTX's collapse.

Industry Response: Calls for Diversification and Transparency

Following the depeg, DeFi developers, investors, and analysts began advocating for several measures to strengthen the staking derivatives ecosystem:

1. Improved Liquidity Pools: Encouraging deeper stETH/ETH liquidity on platforms like Curve and Balancer.

2. Enhanced Transparency: Greater disclosures from staking platforms regarding validator performance, slashing risks, and fee structures.

3. Risk Mitigation Protocols: Development of safeguards such as insurance mechanisms or protocol-native stabilizers.

What Comes Next?

Despite the short-term volatility, industry experts see this as a learning opportunity. The resilience of the DeFi sector and the swift recovery of the stETH peg demonstrated underlying confidence in decentralized systems—but also the need for robust safeguards and contingency planning.

Investors and protocols alike are increasingly wary of over-reliance on any single derivative or platform. With Ethereum’s roadmap progressing towards full withdrawal support and continued L2 scaling, the future of liquid staking remains promising—but it will need to be approached with a stronger understanding of liquidity, counterparty exposure, and market psychology.