Liquid staking and stETH/ETH arbitrage: how the discount works

Liquid staking and stETH/ETH arbitrage: how the discount works

Liquid staking turns staked Ether into a token you can trade. The price of such a token usually stays close to ETH, but sometimes it slips to a discount, and a separate type of arbitrage is built on that.

Let's look at what an LST is, why the discount appears and how traders capture it without betting on the price of Ether.

What liquid staking is in simple terms

In regular staking, Ether is locked in a validator. In liquid staking, a protocol accepts ETH, stakes it itself and issues a receipt token in return, or LST (liquid staking token).

The best-known examples are stETH from Lido and rETH from Rocket Pool. The token represents a claim on staked Ether and rewards, and it can be sold, posted as collateral or added to a liquidity pool.

LSTs accrue rewards in different ways. The amount of stETH in your wallet grows, while rETH appreciates against ETH, so its rate to Ether is above one and rises over time.

Why stETH is cheaper than ETH

The token is not redeemed for Ether instantly. Unstaking goes through a queue, which takes days in calm times and weeks during a mass exit.

While the queue is long, a holder who needs money now sells the token on the market. The price on DEXs and exchanges then depends on the depth of liquidity pools.

During stress, there are more LST sellers than buyers, and the discount widens. From what we see, the discount grows the most when large holders unwind leveraged positions at the same time.

How stETH/ETH arbitrage works

The logic is simple: buy an LST at a discount and get full Ether for it. There are two ways to do this.

• Redemption: buy stETH below ETH, submit a withdrawal request in the protocol and, after the queue, receive Ether one to one.
• Waiting for convergence: buy the token at a discount and sell it on the market once the discount narrows.

While the position is open, the token keeps earning staking rewards. It is a small bonus that partly pays for the wait.

In our view, the redemption route is clearer: the outcome is determined by the protocol's mechanics, not by market sentiment. The price you pay is time, since the money is locked for the entire queue.

stETH arbitrage calculation example: hypothetical numbers

A hypothetical example. A trader buys 100 stETH at 0.994 ETH each and spends 99.4 ETH.

They submit a withdrawal request and, after a hypothetical two weeks, receive 100 ETH. The gross difference is 0.6 ETH, or about 0.6% on the capital invested, from which the trading fee and gas still have to be subtracted.

We believe it is fairer to compare this return with what the same money would earn over two weeks in another trade. The discount looks free, but the waiting time attached to it is very real.

Risks of liquid staking arbitrage

• Smart contract: a bug or hack of the protocol can devalue the token, and one-to-one redemption will be in question.
• Long withdrawal queue: while you wait, the money is idle, and the wait may grow after you enter.
• Deeper depeg: when betting on convergence, the discount may widen, and an early exit will mean a loss.
• Leverage: buying an LST with borrowed Ether turns a temporary discount into liquidation risk.
• ETH to USD rate: if the result is measured in dollars, Ether itself may get cheaper while you wait.

For a dollar-based arbitrage trader, it makes sense to hedge the trade with an ETH short on a perp for the size of the position. Then the result depends on the discount and funding, not on the price of Ether.

Where to track the discount on stETH and other LSTs

The LST price to Ether is shown by DEX aggregators, pool pages and centralized exchanges that list these tokens. The protocol itself publishes the waiting time in the withdrawal queue.

Before entering, check three numbers: the discount, pool depth for your size and the current waiting time. If any one of them is unknown, the calculation is incomplete.

Our tools

It is convenient to open the hedge for an Ether trade where funding and price are better, and you can only see that by comparing all exchanges at once. Our arbitrage screener keeps dozens of venues in one window, refreshes quotes every second and shows each gap together with the volume actually behind it. The spread calculator helps you check what survives fees, network costs and slippage at your size. The bot is fully manual. It never connects to your exchange API keys.

To test the tools on a live market, ArbitrageScanner offers one day of free access to the whole ecosystem.

FAQ (Frequently Asked Questions)

1. What is stETH?

Lido's liquid staking token. It represents staked Ether with rewards and trades on the market like a regular asset.

2. Why is stETH cheaper than ETH?

Because of the unstaking queue and limited pool liquidity. Those who want to exit right away sell the token at a discount.

3. Can you swap stETH for ETH one to one?

Yes, through a withdrawal in the protocol, but not instantly. The request first goes through a queue, which can take from several days to several weeks.

4. What is a stETH depeg?

A deviation of the token's price from ETH. A small discount is present all the time, and during stress periods it widens.

5. How do you make money on the stETH discount?

Buy the token at a discount and redeem it through the protocol or wait for the price to converge. The result depends on the size of the discount, fees, the waiting time and protocol risks.

Conclusion

LSTs like stETH and rETH give liquidity to staked Ether, but their price can drift away from ETH because of the withdrawal queue, thin pools and stress. That discount is the raw material for arbitrage.

The trade is built on redemption or price convergence, and traders hedge against the Ether price with an ETH short. The main cost of this arbitrage is waiting time and protocol risk, so it should be calculated before entry, not after.

IMPORTANT! We are software developers. We do not give recommendations or promises of earnings and we do not advise you to invest your money anywhere. Our software is fully manual, all your money stays under your own control. We show examples of how our clients have earned on arbitrage in the past, but we do not advise repeating those actions one to one. Your earnings depend solely on your own actions and on market factors.