
Lido offers a liquid staking solution that wants to transform the way Proof of Stake (PoS) networks are used. By allowing anyone to stake any amount of tokens and still participate in on-chain activities like lending and farming, Lido could be making another turn in the search for perfect decentralized finance.
Lido is an open-source liquid staking protocol that offers the leading staking version of ETH: stETH. Launched in 2020, it is a protocol that supports major PoS networks and enables users to stake their tokens without locking them up, in a way.
By staking ETH, Lido users will receive stETH in return, which is a liquid staking token (LST) that can be used in various DeFi applications – an interesting way to maintain liquid while your assets are staked nevertheless.
Lido initially focused on Ethereum but has since expanded to support multiple PoS blockchains including Polygon, Solana, Kusama, and Polkadot, as it wants to do the same for any other networks.
This review of Lido Finance (LDO) was created for informational purposes. This article is not intended for promotion.
The process involves users depositing ETH into Lido’s smart contract and receiving stETH on a 1:1 basis in return. The deposited ETH is managed by multiple validators that diversify in case of the risks of slashing, which means validators get penalized for unwanted activity on the mainnet (e.g. MEV).
As validators earn rewards, the value of stETH increases, which reflects the accruing rewards. Notably, there are no lock-up periods or minimum deposit requirements as with the traditional way of staking, making Lido a flexible option for earning staking rewards.
Yes, the Lido protocol has undergone extensive audits to ensure a secure staking platform. These audits are publicly available and continuously updated at Lido’s GitHub repository.
Historically, it has undergone numerous audits by prominent firms like Certora, StateMind, and others.
The Insurance Fund, while not an insurance policy per se, serves as a reserve of stETH tokens that could potentially cover losses from slashing incidents, as Lido charges a 10% fee on staking rewards. The use of this fund in the event of widespread issues is subject to a vote by the Lido DAO.
Lido is governed as a decentralized autonomous organization (DAO), with LDO token (ERC-20) holders collectively making decisions about the protocol’s operations and future direction.
Each LDO token grants one vote in the governance process, allowing holders to influence decisions related to the platform’s operations and policies. The tokenomics of LDO include a total supply capped at 1 billion tokens, with about 895 million currently in circulation.
The allocation of LDO tokens is structured as follows:
When staking with Lido, users should be aware of the fee structure. Lido charges a 10% fee on all staking rewards. This fee is divided equally, with 5% allocated to the Lido DAO treasury and another 5% to the node operators.
Depending on the Ethereum staking reward rate, which is variable, you’ll get different amounts back. A lower amount of total staked ETH means a higher reward rate, with a maximum annual rate of 18.10%.
Then the majority of the staking rewards, 90%, are then distributed to stETH holders according to the size of their stakes.
The unique feature of stETH is its rebasing mechanism, which differentiates it from typical cryptocurrencies. Unlike other tokens where value accrual might be seen through price appreciation, stETH accrues value through a process called rebasing.
This mechanism ensures that holders of stETH do not earn yield by an increase in the token’s value per se, but by an increase in the number of tokens they hold over time.
For example, if you hold one stETH and the annual percentage yield (APY) is 4% over 12 months, you would end up with 1.04 stETH. This increase is reflected directly in your wallet, where the quantity of stETH increases while the individual token value remains relatively stable.
Lending and Borrowing: stETH serves as a valuable form of collateral on lending platforms like Aave and Compound where holders can leverage their staked assets to borrow other crypto or they can lend out their stETH and generate interest income.
Yield Farming: stETH can be supplied to liquidity pools on decentralized exchanges such as Curve Finance and Uniswap, which also earns a share on transaction fees. And could also yield additional rewards in governance tokens or liquidity provider (LP) tokens.
Restaking and Enhanced Rewards: Certain protocols offer the option to restake stETH, enabling holders to compound their earnings. These are liquid restaking protocols.
wstETH, or Wrapped stETH, is a version of Lido’s stETH that addresses compatibility issues with DeFi protocols that cannot support rebasable tokens. wstETH does not rebase; instead, staking rewards increase the price per wstETH.
The interesting thing about this token is that it maintains a constant balance but through an underlying share system that captures the value of accrued staking rewards it increases in price.
This makes wstETH suitable for use in various DeFi applications that require stable token balances, such as many liquidity pools and lending platforms.
The conversion from ETH or stETH to wstETH is facilitated by Lido’s wrapping interface, which locks the original tokens and issues the corresponding amount of wstETH.
Unlike stETH, which is a rebasable token whose balance can fluctuate daily due to accruing staking rewards, wstETH maintains a fixed number of tokens in a user’s wallet. This fixed balance simplifies interactions with DeFi protocols designed for tokens with constant supplies.
Additionally, wstETH simplifies accounting for users, who can more easily track their holdings without adjusting for changes in token quantity due to rewards.
Despite the stable token count, wstETH holders still benefit from value appreciation, as the token increases in value relative to ETH over time, and that is realized when wstETH is unwrapped back to stETH, granting users their initial stETH plus earned rewards.
Lido is the biggest LST provider in crypto (as seen in the pie chart below). ‘Innovative’ as liquid staking offers several advantages over traditional self-staking as it simplifies the whole process and doesn’t take ‘expert knowledge’ or significant minimum deposit (32ETH) as you stake your ETH in a pool, where you can start from any amount.
On the other side, you give over control to a staking protocol, Lido in this case, that controls the staking process and takes a cut of the rewards. However, you are fully liquid when you have your liquid staking tokens that can be used to open positions in other protocols.
But not all protocols will accept them, as the underlying rebase functionality of stETH is not compatible with platforms like UniSwap, 1inch, and SushiSwap that are not optimized for rebasable tokens.
But like any system, Lido is not immune to risks and despite having their smart contracts repeatedly audited and running a bug bounty program, there’s always a chance that some vulnerabilities might slip through.
There’s also the risk of slashing, where validators are penalized for actions that could harm the network. Lido tries to minimize this by spreading their stakes across various reputable node operators, which is a smart move.
Another area of concern is the price of stETH, which should ideally track the value of ETH closely. However, due to restrictions on withdrawals and other factors, there could occasionally be discrepancies between the market price of stETH and its underlying ETH value.
Lido is a decentralized finance (DeFi) protocol that addresses the limitations of traditional Ethereum staking by allowing users to stake ETH while retaining liquidity through its stETH token. An approach that eliminates the need for a minimum staking amount and allows participation from a bigger userbase.
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