Interpretation Project: How Lido DAO Unlocks New Frontiers in Crypto Staking
Shattering Barriers: Lido DAO’s Innovative Approach Redefines Accessibility and Liquidity in Ethereum Staking
What Is Lido DAO?
Lido DAO is a community-led project that offers a liquid staking solution for ETH across multiple chains. (with a primary focus on Ethereum) Essentially, it’s a communal platform that allows anyone to stake their Ethereum without any minimum limit, while collectively sharing in the profits.
What Makes Lido Unique？
1. Compare Lido to solo staking on Ethereum：
- It eliminates the high barrier to entry that comes with solo staking on Ethereum, where a hefty minimum stake of 32 ETH (currently valued at approximately $112,350) can be a daunting prospect for an individual. With Lido, no matter how much ETH you own, you’re welcome to partake in staking activities and earn profits.
- Lido simplifies the staking process. Staking on Ethereum traditionallys involves managing your own node, which comes with the burden of running and maintaining equipment. With Lido, all you need to do is connect your wallet via their website to stake. The task of node management is handled by Lido DAO, freeing you from any hardware expenses and maintenance hassles.
2. Compare to centralized finance (CeFi) staking
- Lido provides superior liquidity. According to the whitepaper, an estimated 60% of the total deposit is expected to be liquid, offering a more attractive alternative to the lower annual percentage returns (APR) often found when depositing ETH in CeFi (Centralized Finance). According to the Dune dashboard byHildobby, there are over 9 million ETH currently staked, and Lido commands the largest staking market share at a substantial 28.97%.
- A DAO (Decentralized Autonomous Organization) like Lido is more secure and dependable than a fully centralized CeFi. Lido’s asset management is executed via a DAO, providing an additional layer of security and reliability compared to wholly centralized CeFi management systems.
Meanwhile, staking in Lido has an added benefit. For each Ether you stake, you get an equivalent anchor token, stETH. This token can be swapped or sold on the secondary market while your original ETH remains staked. This means you can gain additional liquidity and increase the utilization rate of your ETH.
How Does Lido DAO Work?
Understanding how Lido DAO operates is crucial before diving into the reliability and potential risks of staking.Lido DAO serves as a semi-decentralized management model for its operation Its key role involves using deposits on Ethereum to stake 32 ETH as a Node, while maintaining the safety, stability, and efficiency of the entire process.
Node operators hold a significant position in Lido DAO’s functions. These operators manage the nodes and go through a selection and auditing process by the DAO. To offset potential risks associated with human actions, including theft or malicious behavior, Lido has established robust security measures and protocols. Here are some of them:
- Operators can only manage Lido staking contracts. The Ethereum Deposit Contract is controlled via these contracts, which keeps operators from directly accessing the deposit.
- Rigorous Operator Selection: Lido DAO selects node operators based on their demonstrated performance and experience with asset staking. Lido also ensures it selects only the most reliable and trustworthy node operators based on their past performance, security measures, and reputation within the community.
- Decentralization: The DAO structure helps in decentralizing power, ensuring that no single party can manipulate the system.
- Insurance Cover: Slashing penalties can have a detrimental effect on the balances of stETH tokens. To counteract this, a portion of the Lido fee is allocated to an insurance provider. This provider offers protection against reasonably-sized slashing events. In other words, they provide a safety net to mitigate the negative impact of such penalties, ensuring the value of stETH tokens is balanced.
Vasiliy Shapovalov, the co-founder of Lido, brings over a decade of experience in software development and project management to the table. His extensive background includes involvement in the management, architecture design, and development of various projects across multiple domains. These include information security, formal verification, virtualization, and blockchain-based development. Shapovalov’s rich experience and expertise greatly contribute to Lido’s robust and innovative platform.
In comparison to other staking projects, Lido stands out as the market leader, holding a significant 71.43% of the staking market share. This dominant position is backed up by statistics from Defilama, meaning the Lido’s substantial presence and influence in the staking landscape.
Lido has successfully gained substantial financial backing, raising a total of $167 million through five funding rounds. Their investor base includes some reputed names in the industry, such as Andreessen Horowit and Coinbase Ventures, among others. This financial support may underscores Lido’s potential and credibility in the blockchain and staking industry.
Controversy
Firstly, Lido continues to face challenges with its level of decentralization. While it operates in a hybrid zone between centralized and decentralized management, which is more reliable than traditional centralized finance (CeFi), the Ethereum Nodes are still managed by operators selected by the DAO. Additionally, even though stETH is intended to be pegged 1:1 to the Ethereum deposits in Lido, its market price can still fluctuate due to trading dynamics. This volatility might lead to situations where the price of stETH drops below the actual market price of Ethereum.
Hasu, serving as the Strategy Lead at Flashbots and a Strategic Advisor to Lido, delved into the current controversies surrounding Lido during his appearance on the Bankless Podcast. The episode, titled “Hasu Explains: Is Lido a Threat to Ethereum?” highlighted several key concerns:
- stETH token Complexity: Hasu discussed the complex challenges associated with the stETH token. He noted that issues with stETH could potentially lead to a split in the Ethereum network, a challenge that all Proof of Stake (PoS) mechanisms using token derivatives must address.
- Reflecting on systemic risks :Hasu pointed out the dangers of accumulating large amounts of ETH in a single repository, similar to early centralized finance platforms or situations like those experienced by MakerDAO. He mentioned Vitalik Buterin’s caution against allowing DAOs or ICOs to amass large funds, which could heighten the risk of systemic failures.
- DAO security threats: Hasu brought attention to the vulnerability of DAOs to potential attacks. He highlighted the risk of attackers purchasing significant amounts of Lido tokens or manipulating proposals to compromise the smart contract that manages staked ETH, underscoring the hidden danger of security measures to safeguard the DAO and its operations.
Conclusion
Lido DAO has significantly reshaped the Ethereum staking landscape by providing an accessible, secure, and flexible staking solution that caters to a wide spectrum of investors. By removing the traditional barriers such as high entry thresholds and complex node management, Lido has democratized the staking process, allowing more participants to benefit from Ethereum’s growing ecosystem. The issuance of stETH tokens adds a layer of liquidity in the realm of staking, empowering users to remain agile in their investment strategies.
Despite its many advancements and dominant market share, Lido is not without its challenges. Concerns about the level of decentralization, the stability of stETH’s value, and potential systemic risks underline the complexities of operating at the cutting edge of decentralized finance.
However, as the ecosystem matures and more people recognize the benefits of decentralized finance, Lido DAO is optimally positioned to cater to a growing demand for accessible, secure, and profitable staking solutions. Joining staking on Lido now could be a strategic move towards leveraging the burgeoning potential of Ethereum and participating in the gains of its expansive network effects.
