stETH market price dynamics

Many expect stETH to keep a 1:1 peg against ETH, but it has been trading below for a while now.
During the mid-June market crash, it decreased to as low as 0.93 ETH and people started to be afraid of how low it could get.
So what’s influencing stETH price so much? What should you expect until the merge?

What is stETH?

First, stETH is Lido’s tokenized version of staked ETH on Ethereum 2.0 (post-merge chain). Users can deposit 1 ETH to be staked on ETH2 and receive 1 stETH in exchange.
Staked ETH on ETH2 earns yield, which is distributed to stETH holders in the form of more stETH (rebasing).
Some time after ETH2 goes live, every stETH will be redeemable at face value against 1 ETH. In the meantime, users can’t get ETH back through Lido. You have to sell it on the open market, mostly on one of the stETH/ETH curve pools.
To summarize: currently, 1 stETH can be bought on Lido for 1 ETH, or exchanged on Curve at the market price. After the merge, users will be able to get back 1 ETH for 1 stETH.

Now that we know the mechanisms at play, we can start to understand stETH price dynamics.
Sellers are the stETH holders that want to exchange them against ETH now, either because 1) they want to sell their ETH, or 2) they see a risk inherent to Lido or the merge. This means they either think Lido potentially has bugs, or that the merge is not happening any time soon.
During the mid-june market crash, reason 1) was magnified and we saw a significant price drop of stETH, down to 0.93 ETH. Anyone confident in Lido and the success of the merge could step in and buy stETH at a 7% discount.
This is what happened between June 13th and June 18th, when the price of stETH stopped declining against ETH while ETH was making new lows. During this five days period, every dip to 0.9320 ETH was bought.

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Now that volatility has calm down, stETH price is trending back up, now sitting around ~0.962 after declining in the past few days. This reflects remaining sell pressure, or the market doubts on the merge or Lido’s successes. Either way, this should get clearer as we get closer to the merge.

I expect a potential harder depeg of stETH if we see lower prices on ETH. Only 150k ETH are available on Curve to sell stETH, which is not much considering the total quantity of stETH on-chain in the top wallets.
I have no clue about how low it could go, but I’m confident that not enough ETH liquidity is there to defend the peg if an unexpected event were to occur.