Introduction
Lido is a decentralized liquid staking solution built on Ethereum 2.0’s Beacon chain and is governed by the Lido Decentralized Autonomous Organization (DAO). One of its founders is long-time ETH whale and Twitter personality CryptoCobain, also known as Jordan Fish. In an introductory blog post that Fish wrote for Lido in October of 2020, he described Lido as a solution to the problems around staking ETH as it transitions from Ethereum to Ethereum 2.0. Since then, Lido’s platform has expanded to encompass other blockchains. It allows users to stake certain assets without having to lock them up or learn the technical skills to maintain the related infrastructure, lowering the barriers to entry for staking. It seeks to solve the most prevalent problems of exclusive staking protocols like lack of liquidity and accessibility.
Background
There is no Lido without Ethereum. Ethereum’s hyper-growth of transactions and ever-increasing demand is plaguing its ability to be efficient blockchain technology. Its transactions are expensive, block times are long, and the security mechanism is increasingly centralized and energy inefficient. To better scale the ecosystem, Ethereum is migrating its blockchain from a proof-of-work protocol (PoW) to a proof-of-stake (PoS) protocol, marking its transition to Ethereum 2.0. Mining will no longer be relevant to Ethereum and its security infrastructure will begin to rely on network participants to stake their ETH and become validators to approve transactions.
Ethereum’s ambitions look great, but its implementation involves exclusive standards: validators are required to stake 32 ETH (~$110K), high technical proficiency is necessary to set up the validation system on one’s PC, and to avoid penalties for absence, the system must run 24/7. To disincentivize staking ETH even further, staked ETH must be locked up until Ethereum 2.0 enables transfers, potentially locking up staked assets for over a year.
Enter Lido.
Lido was made in response to the strict requirements for staking ETH in the transition period to Ethereum 2.0. Users who stake their ETH with Lido receive the liquid token equivalent in the form of staked Ethereum (stETH). For example, if you stake 20 ETH with Lido, you receive 20 stETH in return. By issuing this ERC-20 token, Lido solves all of Ethereum 2.0’s inaccessibility issues: a 32 ETH requirement, a reliable machine that can run for 24 hours a day for potentially over a year, and the computer engineering skills to pull off Ethereum staking. The stETH token can be transferred, traded, or used in DeFi applications on the Ethereum blockchain, demonstrating the liquidity benefits of holding stETH.
Ethereum Decentralization
In addition to giving people access to Ethereum staking, Lido helps contribute to the long-term decentralization of the Ethereum network through its use of distributed validator sets. A big threat to the decentralization of the Ethereum network is the prevalence of exchanges as large stakers. While they offer their users staking services, they do the actual work while becoming some of the largest block producers in the process. Kraken alone accounts for over 10% of Ethereum staking and exchanges as a whole account for roughly 30%.
Lido’s implementation of distributed validator sets is essential as it provides an alternative to centralized exchanges. The validators are not controlled by Lido, although voted on by the DAO, and are not influenced to act at the behest of Lido in any centralized manner. In accordance with Lido’s smart contracts, they are obliged to behave honestly and simply stake Ethereum. If you would like to contribute to the increased decentralization of the Ethereum network (and earn some rewards in the process), check out the video below about how to stake with Lido using Live Ledger. The video provides a brief but detailed tutorial perfect for a beginner.
Staking Ethereum using Ledger Live | Lido Finance
Tokenomics
Lido Finance’s tokenomics are based on two tokens: the staked token it exchanges to users (in this case stETH) and its governance token (the LDO token). The stETH token is a liquid tokenized version of staked ETH that allows users to participate in the DeFi ecosystem. When a user sends ETH into the Lido staking smart contract, they receive the same amount of stETH in return. The stETH total balance is the sum of deposited ETH and associated rewards minus slashing penalties. Once Ethereum 2.0 enables transactions, the Lido DAO plans to upgrade Lido to allow users to burn stETH in exchange for ETH.
stETH rewards are distributed in three ways: 90% goes to account holders, 5% goes to node operators, and 5% goes to the Lido treasury. Because all involved parties benefit from the stETH rewards, financial incentives encourage everyone to act in a way that doesn’t jeopardize their staking income. The liquid staking system is also incentivized to continue its operations honestly in the current staking environment for the benefit of itself, the users, and the blockchain ecosystem that it derives its product from.
Lowering the barriers to entry for staking by providing liquidity allows for wider participation in the particular blockchain’s operations, increasing decentralization and security. The wider participation also gives users access to staking rewards they otherwise would not have been able to access. The liquidity gives those same users the ability to interact with other dApps, allowing more economic interaction within decentralized finance. The liquidity provider also benefits from the rewards as its small cut of the rewards it pays out to users compensates node operators and adds to its treasury.
LDO
The LDO token is an Ethereum token granting governance rights in the Lido DAO, giving holders the power to vote on key issues affecting the platform. More LDO in a user’s voting contract means more voting power for that user. Holding LDO is holding ownership in the platform that provides liquid staking to some of the biggest blockchains and having a say in the direction of that protocol. Unlike some governance protocols where you earn rewards for staking and participation (like Algorand), LDO cannot be staked. It can, however, be provided as liquidity in various liquidity mining programs. With a circulating supply of 45 million LDO and a total supply of 1 billion, LDO can be found on SushiSwap, 1inch, Uniswap, DeversiFi, Hoo, Hotbit, and Bilaxy.
Lido DAO: Lido’s Governance Infrastructure
The Lido DAO is a Decentralized Autonomous Organization that governs the liquid staking protocol by voting on key decisions related to protocol upgrades, setting fees, assigning node operators and oracles, etc. According to Crunchbase, it raised about $73 million in initial funding in May of 2021 led by VC firm Paradigm with smaller contributing investors from the likes of Coinbase Ventures, Alameda Research, Jump Trading, Digital Currency Group, and Three Arrows Capital. Founding members of the Lido DAO are a diverse mix of angel investors from popular DeFi platforms and venture capital firms that include:
Stani Kulechov of Aave, Banteg of Yearn, Will Harborne of Deversifi, Julien Bouteloup of Stake Capital, Kain Warwick of Synthetix, Semantic VC, ParaFi Capital, Libertus Capital, Terra, Bitscale Capital, StakeFish, StakingFacilities, Chorus, P2P Capital, KR1
The Lido DAO’s mission is to ensure the efficiency and stability of Lido Finance. Just like any DAO, the voting mechanism can be upgraded. The Lido DAO was not natively built, rather it was built from the Aragon framework, a notable platform for building DAOs. Because of this external development, the LDO was made different from many other ERC-20 tokens and is most accurately classified as a Minime ERC-20 token. This makes it more expensive to transfer because it has to track its balance history to prevent the “vote-transfer-vote again” exploit, or double voting.
Efficiency
Lido’s DAO has proven to be incredibly efficient. Lido no longer just has a liquid staking protocol for Ethereum but has expanded to Solana, Terra, and will soon include Aave. The idea of staking SOL through Lido came from a proposal to the Lido DAO. The proposal was made by Chorus One to build a Lido-operated liquid staking protocol for the Solana blockchain on 30 April 2021 and is already live. A similar proposal for Aave was made by Delphi Digital on 2 June 2021 and is currently under construction. Building new functionality into Lido is relatively easy thanks to the DAO and system of proposals. The Lido blog contains more information regarding the LDO token and Lido DAO’s full responsibilities.
Lido for Solana
Akin to Ethereum 2.0., Lido provides a liquid staking solution for the Solana blockchain. As categorized by Staking Rewards, one must have a professional skill set to run a Solana validator. In addition to the high technical knowledge one must possess to run a validator, the hardware requirements are beyond what typical retail markets supply. Solana recommends machines to have at least 256 GB of RAM — not storage, RAM. (For reference, one of the most high-end gaming laptops on Best Buy, the Razer – Blade 15 Advanced, goes for about $3.5K and has only 32GB of RAM.) It also requires a voting transaction of about 1.1 SOL (~$150 at time of writing) for each block the validator approves to participate in consensus.
Lido makes it feasible for the average investor to stake with Solana as it does with Ethereum 2.0. Users who stake SOL with Lido get issued the stSOL token and receive staking rewards in stSOL without having to maintain infrastructure and having the liquidity to interact with other on-chain DeFi apps. Unlike staking with Ethereum 2.0, users can redeem stSOL for SOL through Lido, only having to wait roughly two to three days for the stake deactivation period. To avoid market risk, one could also trade stSOL directly on an exchange.
Lido and the Anchor Protocol
Lido’s collaboration with the Anchor Protocol brings the first liquid staking derivative available as collateral to Anchor known as bLuna (bonded Luna). Built on the Terra blockchain, the Anchor Protocol empowers people to interact with a host of DeFi services like depositing and redeeming Terra stablecoins, minting bAsset (bonded Asset) tokens, collateralized lending, and Anchor governance participation. Although Terra was initially responsible for bLuna, governance was transitioned to the Lido DAO, allowing LDO holders to vote on Luna-specific protocol parameters.
Utilizing the Anchor protocol, Lido’s collaboration extends to the collateralization of stETH into bETH (bonded ETH, a stETH derivative). This secondary derivative (bETH) of a primary derivative (stETH) allows holders who convert their stETH to bETH to interact with services outside of the Ethereum blockchain and within the Anchor ecosystem. Holding an asset on the Terra blockchain gives these new bETH holders access to the same services described for bLuna. In addition to increased access to DeFi on Anchor, bETH doesn’t grow as stETH does, one must claim rewards in the form of UST, Terra’s native stablecoin.
Adoption
Lido is a widely adopted liquid staking protocol with over 36 thousand stakers and a TVL (Total Value Locked) of roughly $6.9 billion. (TVL is the total value held by a DeFi platform within its smart contracts.) Staked Ethereum accounts for about $4.3 billion (~1.33 million ETH deposited). Staked Terra accounts for about $2.2 billion (~65 million Luna deposited). And staked Solana accounts for about $100 million (~621 thousand SOL deposited). Looking at the graph below from Nansen Analytics, it doesn’t look like Lido’s growth will slow down anytime soon. In December of 2020 Lido had under 2 ETH held in its smart contracts. By June it reached 500 thousand ETH and by August it doubled, reaching 1 million ETH. With over 1.3 million ETH held in its smart contracts, Lido continues its aggressive growth.
Applications participating in the Lido ecosystem include the likes of exchanges Curve and 1inch, Ledger, Metamask, and more. Lido has a special integration with the Curve exchange where staking stETH is advantageous because it rewards stakers LDO in addition to CRV (Curve DAO Token). Curve is the most active exchange to interact with stETH while 1inch comes in a distant second. With liquid staking protocols for Solana, Terra, and Aave (in the near future), it’s possible to participate in Lido staking outside of the Ethereum blockchain.
Conclusion
Providing a liquidity derivative to staked assets is interesting because many parties can benefit. The platform providing liquidity gets a cut of the staking rewards of many people. Platform users get to participate in staking, still receive a reward, and continue to have the flexibility of an unstaked asset. Other DeFi applications benefit from those same platform users who get to interact with their services. And the specific blockchain ecosystem gets increased security because staking is accessible to more people.
Considering the failure and error-oriented risks of liquidity staking on a blockchain in development, the risks to liquid staking on a developed blockchain are much lower. Lido’s biggest threat to success is a failure by association if Ethereum 2.0 never makes it to market. Lido created a powerful derivative product and is expanding it well to incorporate other blockchains like Solana and Terra and will soon expand to the Aave network. Lido is actively pushing to see a growth in the role and usability of its staked assets across the DeFi space. To this end, it is exerting effort toward scaling its LEGO (Lido Ecosystem Grants Organization) framework through hackathons and responding to quality proposals to the DAO, enhancing external development contributions. Lido is growing rapidly and shows no signs of slowing down and will become a dominant player in the liquid staking space.