What is Lido: Unleashing The ETH Liquid Staking Protocol
Anatoly Solomin
@solomin_official
The majority of the late blockchains are relying on the staking mechanism for achieving consensus and sustainability in their respective ecosystems. Among all these blockchains, Ethereum stays at the forefront of innovations. In the recent time, there has been significant development done within the Ethereum ecosystem and it has been a trendsetter for the whole crypto industry. One of these key developments is the innovation of “liquid staking” which is vastly dominated by Lido, the first liquid staking protocol to exist.
If you are active in the DeFi landscape, you must have heard there terms – “Liquid staking” and “Lido.” Let’s elaborate on these terms and find out what exactly it is.
What is Lido?
Lido is a non-custodial liquid staking protocol, originally deployed on Ethereum in December 2020. It provides a platform for crypto investors to stake their assets in exchange for synthetic liquid asset and various other reward incentives. Lido was first deployed on Ethereum but it later expanded to other blockchains as well, including Solana, Polygon, Polkadot and others.
Before moving further, let’s first understand what liquid staking is and how does it work.
What is liquid staking?
Liquid staking is a method of staking cryptocurrency in which the original asset is locked in smart contract and an identical asset is rewarded to the user. This identical asset poses the same value as the locked assets and it can be freely sent, received, or used as collateral at different dApps. In traditional staking mechanism, the staked asset is locked and the user only receives it back with additional rewards at maturity. However, liquid staking enables to use asset even when it is staked.
Back to Lido; the staking incentives here are twofold, one in which the staker receives liquid derivative token for their staked asset and second is the yield accrued from staking. The liquid derivative tokens are pegged 1:1 to the underlying staked assets. For example, when you stake ETH on Lido, you will receive stETH – the ETH-pegged token – and certain percentage of returns in accordance with your staking period.
Before Ethereum’s Shanghai upgrade, users were unable to unstake their ETH once staked hence Lido’s liquid staking mechanism gave them the ability to use ETH even when its locked. However, as the Shanghai upgrade has been deployed, ETH stakers can now unstake their ETH anytime and use it. This was supposed bring a few drawbacks to Lido but it still functioning well and sustaining in the market despite severe competition from similar protocols.
According to data from DeFiLlama, Lido currently has a TVL of $32.58 billion with the most contributing on Ethereum. It also has support for leading blockchain networks including Solana, Polygon, Moonbeam, Moonriver and others.
Components within the Lido ecosystem
LDO Token
LDO is the native token for Lido ecosystem which is used to reward stakers. The primary utility of the LDO token is governing the Lido where newer developments and protocol improvement proposals are introduced. This token provide its holders governing rights which they can use to vote in favor or against.
Lido DAO
As Lido is a decentralized staking protocol, it needs to be managed by community of LDO token holders. All those LDO holders form a community aas a Lido DAO for governance and upkeeping the protocol. Lido DAO is also responsible for distributing funds from treasury and covering operational expenses like development updates, community initiatives and more.
How Lido Works?
Lido offers liquid staking functionality to users with issuing stETH tokens on 1:1 basis for ETH staked on its platform. The stETH tokens – which inherits the actual market value of ETH – can be used for trading on different crypto exchanges. It is also used as collateral across various dApps within the decentralized finance (DeFi) ecosystem. Lido currently offers 3% APY (annual percentage yield) on the staked ETH amount.
While stalking on Ethereum mainnet requires minimum of 32 ETH, Lido enables flexible staking with any ETH amount. It later combines all those multiple staking deposits and setup a node. It charges a straight 10% fee on staking rewards which user have to pay while unstaking their ETH. This fee is split between Lido node operators and the Lido DAO treasury. As of June 2024, Lido is operating over 39 nodes across different blockchain networks including Ethereum, Solana and Polygon among which 29 nodes are on Ethereum and 11 on Solana.
Team Behind Lido
Lido was founded by the duo of prominent decentralized application developers, Kasper Rasmussen and Jordan Fish. The current team of Lido includes a number of individuals and highly recognized organizations within the DeFi ecosystem. Lido DAO is the entity looking after the development and management of Lido protocol.
Lido has secured funding from many well-known investors in crypto industry, including Semantic VC, ParaFi Capital, Chorus, P2P Capital, Libertus Capital, Bitscale Capital, StakeFish, KR1 and others. It is also backed by several of the highly esteemed DeFi personalities like Stani Kulechov – the founder of Aave – Banteg of Yearn protocol, Kain Warwick from Synthetix and other.
Conclusion
The DeFi sector has accelerated at high pace in recent hyears with Ethereum at being core. However, it faces many issues and protocols like Lido makes it feasible in the ever-evolving cryptocurrency ecosystem. When it requires 32 ETH to run a node on Ethereum, Lido makes it easier to by lowering the barrier of this initial staking deposit. Users can stake any amount of ETH on the platform provided by Lido while also benefiting with liquid ETH derivative (stETH) which can be used in different DeFi applications. Additionally, Lido is also expanding further by lauinching integrations with several high-in-demand DeFi protocols like Curve, Balancer, and SushiSwap.