What is Lido?
Lido Finance is a service for liquid cryptocurrency staking. How does it work? What is its feature? Let’s find out together!
The protocol allows you to deposit coins into a staking contract and receive an equal amount of “derivative” tokens in exchange, which provide liquidity for the invested assets. As a result, the user can continue to use cryptocurrencies that have been blocked in the stacking contract for financial transactions. For example, they could be deposited in liquidity pools.
ETH is the most popular asset among Lido users, and it can be exchanged for a stETH token. It is, in turn, supported by a number of popular decentralized exchanges.
Lido is controlled by a decentralized autonomous organization (DAO) that uses LDO tokens. Several other cryptocurrencies can also be stacked using the service.
Who created Lido and when?
The project was founded by Konstantin Lomashuk and Vasily Shapovalov.
The Lido’s performance was initially evaluated in the Goerli test network. The new service was launched on December 19, 2020. LDO management tokens, which are used during voting, were issued at the start of the project.
The project raised $2 million in December 2020. Semantic Ventures, ParaFi Capital, Terra, Snakefish, Betting Facilities, and MakerDAO creator Rune Christensen, Aave CEO Stani Kulechov, and Synthetix founder Kain Warwick were among the investors.
Following that, the Paradigm fund invested 15,120 ETH in Lido, receiving 70 million LDO. The investment was approved by the DAO vote. Andreessen Horowitz contributed $70 million to the service in March 2022.
ETH was the first crypto to be made available for liquid staking via Lido.
Which problems does Lido solve?
The Ethereum network is gradually transitioning to the Proof-of-Stake consensus algorithm. The deployment of the Beacon Chain, which began in December 2020, is a critical stage of the process. The network allows users to contribute funds to stacking.
ETH holders can become validators, allowing them to form blocks and receive rewards. However, in order to run a node, you must have infrastructure and computing resources. By delegating funds to validators, ETH owners can earn passive income.
The launch of Ethereum 2.0 takes place in stages, which necessitates the blocking of tokens for an extended period of time. The funds are not expected to be available until the end of 2022. Validators are not eligible for rewards during the specified time frame.
Stickers can only enable or disable a network node. If the latter’s operability is not supported, validators may be subject to slashing and other sanctions.
Non-standard software or a loss of connection could be the cause of the node’s failure. Because premature withdrawal of funds is impossible, these factors increase the risks of stacking.
The validator on Beacon Chain must lock an amount that is a multiple of 32 ETH. For large investors, this restriction is insignificant. Owners of small amounts of capital, such as 16 ETH, cannot become validators. Holders of less than 64 ETH do not have the option of staking a significant portion of their funds.
Lido solves the issues at hand. The service allows for the delegation of ETH to trustworthy validators and the deposit of any amount, as well as the use of derivative financial instruments.
How does Lido work?
Lido enables users to block ETH in a smart contract and receive stETH tokens in exchange. Market participants can deposit any number of coins, allowing you to circumvent the 32 ETHAN limit.
stETH is compatible with decentralized applications from the DeFi sector, giving users access to additional revenue streams. Coins can be invested in liquidity pools, used as collateral for loans, and sold on the open market.
The token is extremely liquid. It is the link between Ethereum 1.0 and Ethereum 2.0.
Large validators receive funds from the staking service. The income is distributed to stETH owners on a daily basis. This causes a shift in the user balance, which takes into account both rewards and penalties.
Lido charges a 10% commission on all income received. Users will receive their invested ETH and rewards once transactions begin on the Beacon Chain network. Simultaneously, stETH tokens will be liquidated.
What does Lido consist of?
The structure of Lido is made up of two parts: a staking pool and an oracle.
The Ethereum network’s smart contracts are used to implement the staking pool. The scheme governs how service participants interact with one another:
Users send ETH to the appropriate address to deposit funds. Smart contracts ensure that stETH is released and burned. The funds are delegated to nodes in the Beacon Chain network with their assistance. The active validator sends coins in increments of 32 ETHAN.
The validator addresses in the list are added and removed by DAO. A smart contract containing data about the nodes is used to coordinate their work.
Validators should generate Beacon Chain keys and send them to Lido. They must also create a separate smart contract to receive the stacking funds.
When assets are available for withdrawal, they will be sent to users’ Ethereum 1.0 or 2.0 network addresses. In the second case, Lido uses an account that is managed using a threshold signature. The DAO determines the direction of funds withdrawal.
Oracle monitors the validity of validators in the Beacon Chain. According to the scheme, the interaction of the parties in the Ethereum 1.0 network is implemented using smart contracts.
The payment of awards results in an increase in the amount of funds, while the receipt of fines decreases. Oracle collects data every day, allowing you to update user balances on a daily basis. Following the distribution of the rewards to the validators, an additional issuance of stETH is made.
Users receive 90% of the revenue generated by the distribution of coins. The remainder of the receipts are split evenly between the Lido Treasury and the node operators. The new service does not require trust between the parties because of smart contracts.
How does the Lido tokenomics work?
The staking service uses LDO, stETH tokens and “derivative” tokens of other blockchain platforms, such as Polkadot (stDOT) or Solana (stSOL).
stETH (Lido Staked ETH) is an Ethereum network ERC-20 standard token. The current issue of coins reflects the value of the owners’ assets. Tokens are distributed following the deposit of ETH and the receipt of awards from validators.
The Lido DAO Token (LDO) is an ERC — 20 standard token used to manage the Lido. The maximum offer is one billion dollars. The staking service’s founders received 64% of the specified amount. The first participants of the project got an airdrop in the amount of 0.4% of the maximum issue.
More than 290 million LDO are in circulation. For one year, the tokens of the project’s founders are blocked. The coins will be made available to owners over the next year. As a result, all tokens will be unblocked for the next two years.
Who manages Lido?
DAO manages Lido, allowing you to change the parameters of the staking service on the fly. The organization ensures commission regulation, as well as the adoption of updates and improvements. The voting mechanism is also changeable. Users use LDO tokens during surveys, and the weight of the vote is proportional to the number of coins.
Autonomous management enables you to eliminate failures common in centralized organizations, lowering user risks. DAO enables you to create a project using Treasury funds. The latter contained 35% of the maximum LDO emission.
Users of the service or other entities can make suggestions on the use of tokens. The DAO may issue additional coins to raise funds or for marketing purposes.
Who owns Lido’s assets?
If you want to add ETH to the stack, you must provide the Ethereum 2.0 network address used for withdrawals. To access the account, you must first generate a private key. The TAO should have authority over its storage and use.
To solve this issue, Lido employs a threshold signature.
The latter is divided into 11 sections, each of which is dedicated to a specific topic. A consensus of six or more participants is required to access funds.
This solution does not necessitate trust in a single person or company, but rather trust in the majority of address owners. The threshold signature is a temporary solution caused by the peculiarities of Ethereum 2.0.
There are many well-known personalities and organizations among the owners of the address. The signatories included: Chorus One, Staking Facilities, Certus One, Argent, Banteg from yearn.finance, Alex Svanevik from Nansen, Anton Bukov from 1inch, Michael Egorov from Curve/Nucypher, Rune Christensen from MakerDAO, Will Harborne from DeversiFi and Mustafa Al-Bassam from Celestia.
The threshold signature keys were generated from December 13 to December 16, 2020, after which the account holders provided reliable data storage. Lido intends to reverse this decision once the technical possibility is revealed.
Which cryptocurrencies does Lido support?
In addition to Ethereum, the protocol supports liquid stacking of several other coins:
- Solana (SOL);
- Kusama (KSM);
- Polygon (MATIC);
- Polkadot (DOT).
Until May 2022, Lido could issue derivative tokens backed by Terra (LUNA) coins, but the project removed this asset from its list of supported assets due to its rapid depreciation. Subsequently, DAO Lido voted against integration into the Terra 2.0 network protocol.
How is Lido evolving?
Lido remains one of the most popular ETH stacking solutions, and the protocol ranks in the TOP 5 in terms of the volume of blocked funds.
Chainlink has begun working with the staking service. The price channel for the stETH token has been added by the developers. The coin will be able to be used in DeFi protocols thanks to the tool. The price channel, according to the developers, can be used in Aave, Compound, and Enzyme.
Ethereum is being developed with the help of Lido developers. In April 2022, the project allocated $6 million for ecosystem development and introduced the distributed validators Ethereum 2.0 technology.
The collapse of Terra, according to Goldman Sachs analysts, caused the “infection” of the stETH token and increased the systemic risks of Ethereum, because Lido accounts for roughly one-third of the total volume of ETH blocked in the staking contract.
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