Lido: Leading Liquid Staking Service Provider

Lido went operational in December 2020, just a few weeks after the Ethereum 2.0 Beacon Chain. Staking on the Ethereum blockchain has several drawbacks. Only multiples of 32 ETH can be staked. There are also operational hurdles, such as the requirement for technical competence to participate. Furthermore, the staked ETH is tied to the ETH 2.0 first phase and cannot be utilized in any other protocol.

Lido's non-custodial staking services try to address these difficulties. This is in contrast to the staking services provided by exchanges. The issuance of stETH, a tokenized version of staked ETH, solves the capital inefficiency problem. Users can still use their staked money in other protocols with this token.

Lido's initial focus was Ethereum, but it is now branching out to other blockchains. Staking on Terra began in March 2021, and staking on Solana started in September 2021. Stakeholders of Terra's native LUNA asset or Solana's SOL asset receive a derivative token, similar to Ethereum (bLUNA or stSOL).

Lido's main product is liquid staking or the tokenization of staked assets. The Lido DAO runs the protocol, manages its smart contracts, and keeps track of the assets deposited by users. Lido was first developed for Ethereum 2.0's Beacon chain, but it has since been used by Terra, Solana, Kusama, and Polygon. Lido presently provides users annual percentage rates (APR) ranging from 4% to 24% and charges a 10% fee on all staking rewards.

How Does Lido Work?

Users interested in staking with Lido must first deposit ether into the Lido smart contract, which operates on Ethereum 1.0. In exchange, the user receives stETH, which is a tokenized version of ether staked by Lido. The stETH token can be used to participate in various decentralized protocols by its holders (e.g. lending). When stETH tokens are deposited, they are created and then burned. Withdrawals of staked ether are now unavailable but will be available after Ethereum 2.0 introduces transfers from their smart contracts.

The Lido DAO distributes the deposited ether among the chosen node operators. Node operators run validator nodes on behalf of the protocol. The Ethereum proof-of-stake deposit contract then locks the deposited ether. Oracles are utilised to interact between the beacon chain and the Ethereum 1.0 chain.

The oracles, in particular, keep track of the validators' balances on the beacon chain. They daily communicate this data to Lido's Ethereum 1.0 smart contract. A validator's balance might rise as a result of incentives or fall due to slicing and staking penalties.

The stETH token ratio is computed with each update that the oracle submits. A profit is achieved if the staking incentives are more significant than the slashing penalties. The stETH balance rises by the same amount. Staking rewards are subject to a 10% charge, half of which is allocated to node operators and split according to their portion of the total stake value. The remaining half is donated to the Lido's Treasury.

Tokenomics

The Lido protocol has two types of tokens: the Lido DAO governance token LDO and tokenized versions of staked cryptocurrencies, such as stETH on Ethereum, stLUNA on Terra, stSOL on Solana, stKSM on Kusama's Moonriver parachain, and stMATIC on Polygon.

LDO was launched on January 5th, 2021, with 1 billion tokens issued. The Lido DAO treasury received 36% of the unlocked and deposited tokens. The founding members received 64 percent of the tokens.

These tokens will be vested over one year after being locked for one year. Early stakers received 0.4 percent of the total supply as an airdrop from the Treasury. Owners of LDO can vote with a voting weight according to the amount of LDO they have invested in the voting contract.

When users deposit assets into Lido's smart contracts, they are given tokens representing the staked assets (for example, stETH for depositing ETH) and begin to get staking incentives. These tokens can be considered derivatives, with their value derived from the staked tokens. The method for collecting staking rewards and withdrawal choices differs for every chain.

Staked ETH will be frozen until the final step of the Ethereum 2.0 transition, which is likely to happen in the third quarter of this year. On other chains, withdrawals are permitted. LUNA can be unstaked right away if it has been staked. On Solana, Kusama, and Polygon, the unstaking process can take anywhere from a few days to two weeks.

Lido DAO’s Governance

Users can submit suggestions to the Lido DAO's governance platform, including Lido Improvement Proposals (LIPs) for fundamental protocol modifications, for discussion: https://research.lido.fi/. Before being introduced, a proposal must meet all documentation and format standards, and it will be manually reviewed by an editor. After that, the community can discuss the LIP on forum.lido.com.

The idea will be added to a governance call once it is deemed sufficiently mature, where it will be discussed for inclusion in a future platform upgrade. Lido also uses Snapshot's off-chain voting forum, which serves as a signalling platform for determining proposal sentiment before on-chain voting begins.

Conclusion

Lido has developed remarkably since its start as an innovation in liquid staking, and it is well-positioned to remain the top provider of liquid staking in DeFi. Its future success will be determined by its ability to stay competitive as other platforms begin to offer comparable services. Lido is currently the biggest liquid staking service provider and has a major market share. It is expected that liquid staking will become more popular after Ethereum’s merge update, and Lido will see more inflow of ether.