Goldman Sachs says DeFi's interconnections may increase systemic risk

Goldman Sachs says DeFi's interconnections may increase systemic risk

Contagion risk related to the UST spinoff has impacted Staked Ether (StETH) due to Lido's exposure to the Terra ecosystem, the bank said.

A little-noticed impact of the terraUSD (UST) collapse relates to Lido, a liquid staking protocol, Goldman Sachs said in a report Friday, showing how decentralized financial application (DeFi) connections amplify systemic risk.

Lido is a DeFi application that allows holders of Ether (ETH) to set aside tokens to validate transactions while earning returns. Investors receive a stacked Ether token (stETH) at a 1:1 ratio and can use it as loan collateral or in supported trading pools, according to the bank.

The collapse of UST has impacted stETH, with the token trading at a 4.5% discount to ETH, Goldman said. That's because stETH holders were able to convert their tokens into bonded ether (bETH) and earn rewards on Terra's Anchor Protocol. As a result, stETH was vulnerable to Terra blockchain stoppages that impacted withdrawals, according to the report.

This event is important because one-third of all Ether used is deposited in Lido and shows how DeFi's composability can theoretically "increase systemic risk," the bank said.

DeFi is an umbrella term for lending, trading and other financial activities conducted on a blockchain without traditional intermediaries.