What you need to know about staked ether, the token at the center of crypto's liquidity crisis

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Another controversial cryptocurrency is causing havoc in the digital asset market — and this time, it's not a stablecoin.

Staked ether, or stETH, is a token that's supposed to be worth the same as ether. But for the past few weeks, it has been trading at a widening discount to the second-biggest cryptocurrency, fanning the flames of a liquidity crisis in the crypto market.

On Friday, stETH fell as low as 0.92 ETH, implying an 8% discount to ether.

Here's everything you need to know about stETH, and why it has crypto investors worried.

Each stETH token represents a unit of ether that has been «staked,» or deposited, in what's called the «beacon chain.»

Ethereum, the network underpinning ether, is in the process of upgrading to a new version that's meant to be faster and cheaper to use. The beacon chain is a testing environment for this upgrade.

Staking is a practice where investors lock up their tokens for a period of time to contribute to the security of a crypto network. In return, they receive rewards in the form of interest-like yields. The mechanism behind this is known as «proof of stake.» It's different from «proof of work,» or mining, which requires lots of computing power — and energy.

To stake on Ethereum currently, users have to agree to lock away a minimum 32 ETH until after the network upgrades to a new standard, known as Ethereum 2.0.

However, a platform called Lido Finance lets users stake any amount of ether and receive a derivative token called stETH, which can then be traded or lent on other platforms. It is an important part of decentralized finance, which aims to replicate financial services like lending and insurance using blockchain technology.

StETH isn't a stablecoin like tether or