Lido (LDO) is a secure liquid staking solution for Proof-of-Stake (PoS) cryptocurrencies. It supports Ethereum 2.0 (The Merge) staking and a growing ecosystem of other Layer 1 PoS blockchains. Users can stake their PoS tokens on Lido and receive a tokenized version of their staked assets at a 1:1 ratio. This staked asset representation can then be used within other DeFi protocols to earn additional yield, all while users continue to receive staking rewards on the tokens they deposited into Lido.
Introduction to Liquid Staking
One of the primary challenges with staking on PoS blockchains is the lack of liquidity for staked assets. Once tokens are locked, users cannot access or unstake them until the lock-up period ends. This prevents them from pursuing additional yield opportunities elsewhere in the market. Complicated validator setup processes and high entry barriers further deter the average retail user from participating in PoS staking.
To enhance the liquidity of staked tokens and make staking more accessible, Lido offers a modern alternative to traditional PoS staking.
What Is Lido?
Launched in 2020, Lido is a liquid staking solution for Ethereum (ETH) and several other prominent PoS blockchains, including Solana (SOL), Polygon (MATIC), Polkadot (DOT), and Kusama (KSM).
Lido issues users a tokenized version of their staked assets at a 1:1 ratio. This provides liquidity for their staked PoS tokens, enabling them to earn staking rewards on Lido while simultaneously participating in other on-chain DeFi activities to generate extra income.
How Does Lido Work?
Liquid staking services like Lido allow users to stake any amount of PoS assets to earn block rewards, broadening participation in securing PoS networks. This innovative approach addresses the common issues of poor liquidity, complexity, and centralization associated with conventional staking. It also significantly lowers the entry barrier and reduces the opportunity cost related to lock-up conditions.
When a user deposits PoS assets into Lido, their tokens are staked on the PoS blockchain via the Lido protocol. A staking pool smart contract manages user deposits and withdrawals, delegates funds to node operators, determines fees for staking rewards, and handles the minting and burning of tokens. This smart contract also maintains a full list of node operators, their validator keys, and reward distribution records.
In return for their deposit, users receive a tokenized representation of their funds (known as stAsset tokens). These tokens can be used within the original deposit protocol and across other DeFi protocols and decentralized applications (dApps) to earn simultaneous rewards. Common uses include serving as collateral for loans or in liquidity mining pools to maximize overall yield.
A Closer Look: Staking Ethereum with Lido
With Ethereum's transition to Proof-of-Stake via "The Merge" (previously known as ETH 2.0), any user can, in theory, stake a minimum of 32 ETH to become a validator and receive payments for confirming network transactions. However, this minimum stake is prohibitively high for the average user.
Lido enables users to earn block rewards by staking any amount of ETH, even a fraction of a single token. After staking their ETH, users receive stETH, an ERC-20 token that represents their deposited ETH at a 1:1 ratio. stETH tokens are minted when funds are deposited into Lido's staking pool smart contract and are burned when a user withdraws their ETH.
The ETH deposited by users is distributed to node operators (validators) on the Lido network and is then deposited onto the Ethereum Beacon Chain for validation. User funds are secured within the smart contract, and the validators themselves cannot access them. The Lido DAO is responsible for selecting, registering, and supporting validators, adding their addresses to a registry smart contract. Selected validators subsequently receive a set of validator keys.
A user's deposited ETH is split into multiple batches of 32 ETH across all active Lido node operators. These operators use public validator keys to verify transactions involving the users' staked assets. Distributing a user's stake across multiple validators effectively eliminates the single point of failure risk associated with staking with just one validator. Furthermore, node operators set up a specific address to allow users to withdraw their staked ETH once The Merge is fully complete.
The Role of Lido DAO
To govern the Lido protocol in a decentralized manner, Lido established a Decentralized Autonomous Organization (DAO). This DAO makes key decisions regarding the protocol's operations, ensuring it aligns with the best interests of its stakeholders and promoting greater transparency and decentralization.
The Lido DAO governs the suite of liquid staking protocols. It uses smart contracts to establish and enforce rules, facilitating an efficient, decentralized decision-making process. This includes managing fee parameters and their allocation, as well as the addition and removal of node operators on the network.
What Is LDO Token?
LDO is the native utility and governance token of the Lido ecosystem. It is also an ERC-20 token with a total supply of 1 billion.
LDO is used to reward users on the network. More importantly, it grants holders governance rights within the Lido DAO, allowing them to participate in the governance process by voting on key proposals. The more LDO tokens a user holds, the greater their voting power.
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Frequently Asked Questions
What is liquid staking?
Liquid staking is a process that allows users to stake their cryptocurrency assets while receiving a liquid token in return. This token represents their staked position and can be used elsewhere in the DeFi ecosystem to generate additional yield, solving the liquidity problem inherent in traditional staking.
How is stETH different from ETH?
stETH is a token that represents ETH that has been staked through the Lido protocol. Its value is pegged 1:1 to the ETH that was deposited. While it can be traded or used in DeFi, it also rebases daily to reflect the staking rewards earned on the underlying ETH.
Is staking with Lido safe?
Lido's smart contracts have undergone extensive audits by reputable security firms. The protocol uses a decentralized set of node operators and is governed by a DAO, reducing centralization risk. However, as with any DeFi protocol, there are always inherent smart contract and slashing risks involved.
Can I unstake my assets at any time?
With Lido, you can typically unstake your assets without a waiting period by selling your stAsset tokens (like stETH) on the open market. To directly redeem them for the underlying asset, you must wait for a withdrawal period after initiating the process, which varies by blockchain.
What blockchains does Lido support?
Lido initially launched support for Ethereum but has since expanded to other PoS networks. As of now, it supports liquid staking for Ethereum, Solana, Polygon, Polkadot, and Kusama.
What are the fees for using Lido?
Lido charges a commission on the staking rewards earned by users. This fee is used to cover protocol maintenance and to reward node operators. The specific fee percentage is determined by the Lido DAO.
Conclusion
Lido's liquid staking service provides users with all the benefits of staking without forcing them to sacrifice the liquidity of their tokens. It caters to the needs of both small and large PoS token holders, offering the flexibility to stake and unstake positions readily. Furthermore, by removing complex staking setup requirements and providing a lower entry barrier to PoS staking, liquid staking on protocols like Lido is poised to fuel the continued growth and adoption of DeFi in the future.