Goldman Sachs Says DeFi’s Interconnections Can Increase Systemic Risk

One little-noticed effect of the terraUSD (UST) collapse relates to Lido, a liquid staking protocol, Goldman Sachs (GS) said in a report Friday, and shows how the connections between decentralized finance (DeFi) applications amplify systemic risk.

Lido is a DeFi app that allows ether (ETH) holders to set tokens aside to validate transactions while also earning yield. Investors receive a staked ether token (stETH) at a ratio of 1:1, and can use it as lending collateral or across supported trading pools, the bank said.

The collapse in UST hit 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 halts, which impact withdrawals, according to the report.

This event is important because Lido has one-third of all staked ether deposited in it and shows how “DeFi’s compostability can theoretically increase systemic risk,” the bank said.

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

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