Lido: A Look Under the Hood
Lido is a liquid staking solution that enables users to earn rewards on a variety of PoS networks
Overview
What is Lido?
Over the past year, Lido has made a huge impact on the DeFi space, climbing its way to becoming the top protocol by TVL with 11.76b total and even outpacing MakerDAO. Now it’s easy to see why, considering the impressive growth in popularity that Liquid Staking Protocols have had, not only before but also after the Shapella upgrade.
So, you might be wondering, what exactly is Lido? In a nutshell, Lido enables users to stake their assets on various PoS networks, while still maintaining liquidity through stTokens. These stTokens give users the freedom to explore the DeFi landscape as they did before, and for example, can even be used as collateral on lending platforms. The best part? You are still receiving the daily staked rewards on your original locked assets.
How Does Lido Work?
As mentioned above, when you stake within Lido you will receive an stToken that represents your share, basically acting as a “stand-in” for your locked tokens. Using ETH as an example, when you deposit into Lido, you’ll be given stETH in return. This stETH functions just like regular ETH and can be used on any supporting dApp, giving you the flexibility to engage with various platforms without restrictions.
What makes Lido and Liquid Staking Tokens (LSTs) in general so special is the ability to enhance your capital efficiency. While it’s true you’re already earning rewards from beacon chain staking, LSTs enable you to take it a step further. Thanks to the transferability of these tokens, you can deposit them into other protocols, amplifying their potential. For instance, Vesper, a yield aggregator, enables you to deposit stETH and earn extra yield through the pool strategies it utilizes, on top of your already accruing staking rewards, creating a “plus-plus” effect. You could even boost your earnings further by depositing your newly acquired “vTokens” into Metronome’s Smart Farming. By looping that position, you create even more yield opportunities.
Although initially, Lido’s primary focus was on Ethereum, they have since expanded their support to include Solana, Polygon, Polkadot, Terra, and Kusama. Every chain utilizes the same stToken format for representing each supported asset. For instance, Polygon uses stMATIC, while Solana uses stSOL, and so on. Learn more.
Key Takeaways
- Hassle-free staking process: Lido provides an effortless way to stake digital assets and earn rewards, bypassing minimum deposit requirements and hardware setup concerns.
- Staked assets stay liquid: Unlike conventional staking, Lido’s stTokens offer liquidity, enabling users to swap, trade, and transfer them whenever needed. They are widely compatible with DeFi protocols across L1 and L2 blockchains.
- Rapid unstaking: Standard PoS protocols often involve waiting periods for unstaking, which can be lengthy and unpredictable, particularly during market fluctuations. Lido enables stakers to swap their stTokens for other assets on secondary markets, ensuring a swift exit.
stETH vs wstET
When utilizing Mainnet on Lido, users can receive two types of stTokens — stETH and wstETH. While they may appear similar and often function in the same way, the way they reflect staking rewards differ. StETH uses a rebate system that periodically boosts an stETH balance with rewards on a daily basis. This kind of system works well for DeFi applications such as Curve, however, is not suitable for DEXes like Uniswap due to them requiring a constant balance mechanism for tokens. As a result, you may risk losing out on a portion of your daily staking rewards by providing stETH as liquidity on these platforms.
To tackle this challenge, Lido developed wstETH, which maintains a consistent balance as its value steadily rises, factoring in staking rewards through an underlying share system. By using wstETH, users can interact with and contribute liquidity to previously “incompatible” protocols. It’s also worth noting that stETH can be seamlessly converted to wstETH, and vice versa, through their trustless wrapper at any given moment.
Basic example:
- “User wraps 1 stETH and gets 0.9803 wstETH (1 stETH = 0.9803 wstETH)
- A rebase happens and the wstETH price goes up by 5%
- User unwraps 0.9803 wstETH and gets 1.0499 stETH (1 stETH = 0.9337 wstETH)” — More.
What is the Lido DAO?
As Lido is a Decentralized Autonomous Organization (DAO), anyone who holds their native token (LDO) can become a part of its governance system. In doing so, key decisions on parameters such as setting fees or assigning node operators and oracles can be voted upon. The voting weight of LDO depends on the number of tokens held, so effectively the more you hold the more voting power you have.
As stated by Lido, DAO members should do the following:
- Build, deploy, update, and decide on key parameters of liquid staking protocols.
- Approve incentives for parties that contribute towards DAO’s goals.
- Manage node operators.
- Approve LEGO grants to support different research.
- Ensure smooth payments to full-time contributors.
- Manage the bug bounty program.
- Respond to emergencies.
- Accumulate service fees from Lido.
Additionally, any service fees the DAO accumulates will be used for research, development, liquidity mining, and protocol upgrades.
Summary
To summarize, Lido has been a key player in the DeFi space by offering a liquid staking solution that supports multiple PoS networks, while providing flexible options in the form of wstETH for users wanting to utilize certain protocols. With its hassle-free staking, compatibility with a wide range of DeFi protocols, and rapid unstaking, Lido appeals to users seeking greater capital efficiency and rewards. As a Decentralized Autonomous Organization, Lido also empowers LDO token holders to participate in the platform’s governance system, ensuring a community-first ecosystem.
