In the constantly evolving cryptocurrency world, staking has become popular for crypto holders to generate passive earnings through staking rewards.
Yet, traditional staking has significant limitations, like locking up assets for extended periods. This capital inefficiency leaves investors trapped by pursuing yield rather than being able to use their capital to stimulate growth in other parts of the ecosystem and earn yield elsewhere.
Enter Lido, a decentralized autonomous organization (DAO) that revolutionized staking by providing a liquid staking service for Ethereum 2.0. Lido’s liquid staking service allows stakers to earn staking rewards while still keeping liquidity.
It’s a revolutionary concept, but before we discuss how Lido functions, let’s review how staking actually works.
Staking 101: A Brief Recap
Staking is a process that allows cryptocurrency holders to participate in network security and earn rewards by locking up their assets for Proof-of-Stake (PoS) chains.
Ethereum (ETH), Cardano (ADA), Polkadot (DOT), Tezos (XTZ), Cosmos (ATOM), Algorand (ALGO), Avalanche (AVAX), Solana (SOL), and Binance Coin (BNB) are all Proof of Stake.
First, the user transfers their coins into a wallet that supports staking functionalities. Next, the user locks (stakes) these coins, typically picking a validator node to delegate their stake to. Alternatively, you could run a full node and stake that way, but it’s much more cost-intensive.
From an outsider’s perspective, staking might seem complex, especially with all the new variations emerging today. The process is actually pretty simple– a few clicks and you’re staking.
Cryptocurrencies like ETH generally offer between 3% to 5% APY, whereas others like Polkadot offer up to 15%.
While staking offers a steady (but not risk-free) yield stream, it also poses several challenges.
Traditional staking requires users to lock up their assets for a fixed period, making them inaccessible for trading or other purposes. This can be a drawback for investors who want to maintain flexibility with their funds.
Some staking solutions offered by exchanges or third-party providers come with custodial risks, meaning users must trust these entities with their assets.
However, we’ll explore some non-custodial means of staking and generating the exact yield– sans the custody risk.
Lido as a Solution to Staking Illiquidity
Lido was founded in December 2020 by Konstantin Lomashuk, Vasiliy Shapovalov, and Jordan Fish, known as Cobie. Lido has been well-received in the crypto community for its approach to liquidity for staked assets.
Early supporters and investors included prominent organizations like Paradigm, Coinbase Ventures, and Andreessen Horowitz (a16z).
Initially focused on the Ethereum ecosystem, Lido expanded its support beyond Ethereum to include other significant blockchains like Solana, Terra (RIP), and Polygon.
It sunset its Solana staking service in February 2024.
As of 2024, Lido has over $33 billion in TVL and has issued millions of stETH tokens.
Lido’s Staking Solution
Users who stake their Ether with Lido receive stETH tokens in return and can continue to earn staking rewards while using the stETH as they wish.
stETH tokens represent their staked Ether plus any rewards earned and can be traded, held, or used in various DeFi applications.
stETH and ETH trade around the same price, but stETH’s price is typically a hair higher due to the rewards factoring into its price at issuance. Each stETH token is a claim to the staked amount of Ethereum.
How Does Lido Work?
Lido comprises critical components: the stETH token, smart contracts for deposits and minting stETH, a node operator registry, and beacon chain oracles for updating stETH balances.
Users must deposit Ether into Lido’s smart contracts to receive stETH tokens representing their staked Ether, including rewards minus any slashing penalties.
From a technical POV, Lido generally works like this:
- Users send Ether to the Lido smart contract.
- The intelligent contract mints an equivalent amount of stETH tokens.
- Node operators validate the staked Ether.
- Oracles continually monitor the beacon chain and update stETH balances.
- Users can trade, hold, or utilize stETH in DeFi applications.
- Lido DAO actively manages governance, including upgrades and emergency responses.
From a layman’s POV, Lido is much more straightforward:
- Set up your wallet of choice (MetaMask, Ledger, etc.)
- Connect wallet to Lido platform: the official link is https://lido.fi/.
- Deposit ETH on Lido and receive stETH tokens.
- Trade or use the stETH in DeFi. This is called liquid staking.
How to Stake on Lido: A Quick Guide
Many centralized exchanges, such as Coinbase, allow you to stake ETH through the platform, but those are pretty self-explanatory. They also come with custodial risks.
We’ll go over a hard wallet and a soft wallet to find a way to do it.
Setting Up a Wallet
Before you can stake with Lido, you need a compatible cryptocurrency wallet. MetaMask and Ledger are popular choices.
- MetaMask: A browser extension and mobile app that serves as a wallet for Ethereum and other ERC-20 tokens.
- Ledger: A hardware wallet that provides enhanced security by keeping your private keys offline. Ledger devices are compatible with Lido through integrations with software wallets like MetaMask.
While both routes use MetaMask, the Ledger is safer, and your private is kept on your physical hardware device.
Connecting to Lido
- Access the Lido Platform: Visit Lido’s official website and navigate the staking section.
- Connect Your Wallet: Click on the “Connect Wallet” button. You will be prompted to choose your wallet type. If you’re using MetaMask, select it and follow the on-screen instructions to connect. For Ledger, you’ll need to use MetaMask as a bridge:
- Open MetaMask and ensure your Ledger device is connected and unlocked.
- Select the Ledger account from MetaMask to connect it to the Lido platform.
Staking Your Ether (ETH)
Once your wallet is connected, you can stake your Ether:
- Deposit ETH: Enter the amount of Ether you wish to stake. The platform will display the equivalent amount of stETH you will receive.
- Confirm Transaction: Approve the transaction in your wallet (MetaMask or Ledger via MetaMask). This will involve signing the transaction and paying a small gas fee.
- Receive stETH: After confirming the transaction on the Ethereum network, you will receive stETH tokens in your wallet. These tokens represent your staked Ether and can be traded or used in other DeFi applications.
Managing Your stETH
With stETH in your wallet, you can do the following:
- Trade stETH: Use decentralized exchanges (DEXs) like Uniswap to trade stETH for other cryptocurrencies.
- Earn Yield: Participate in DeFi protocols by lending your stETH or providing liquidity in pools to earn additional rewards.
- Monitor Rewards: Your stETH balance will automatically update to reflect staking rewards, which are earned continuously based on the performance of the Ethereum 2.0 network.
Liquid staking is a rabbit hole worth exploring, and we recommend setting some time aside to go through our guide. However, it’s not much different from the staking process described above.
Participating in Governance
Lido is governed by a DAO, which manages the decentralized protocol. The DAO is responsible for selecting node operators, managing funds, and making key protocol decisions.
Governance is facilitated through Lido’s native token, $LDO, which grants holders the right to vote on protocol upgrades and other important matters.
Lido employs a threshold signature scheme to enhance the security of staked assets. This scheme ensures that no single entity controls the funds, reducing the risk of hacking or mismanagement. Additionally, Lido uses beacon chain oracles to update stETH balances and maintain transparency.
For more detailed information, you can refer to the official Lido documentation on their GitBook.
As a stETH holder, you can also participate in Lido’s governance. Voting requires LDO tokens.
Lido Competitors
Although Lido is a pioneer in its accessible platform and liquid staking, it’s not alone in its offering.
RocketPool is a decentralized staking service for Ethereum 2.0, but it focuses more on providing infrastructure for node operators.
Ankr also staking solutions with a liquid staking feature akin to Lido’s stETH, but with a variety of chains.
Part of the Frax Finance ecosystem, Frax Ether offers liquid staking for Ethereum, with a TVL of about $700 million.
Final Thoughts
Similar to how Robinhood democratized stock trading, Lido democratizes Ethereum staking with a user-friendly UI and the flexibility that comes with liquid staking.
Lido has a few dependencies worth noting, such as its reliance on Ethereum. To be fair, it launched as an Ethereum staking service, but as it broadens its staking services to other chains, it diversifies its business model.
A standout concern is the risk of stETH tokens dipping below their ETH value, which is unlikely, but would largely be indicative of some deeper technological issue or exploit.
Lido has emerged as a prominent player in the DeFi industry, establishing itself as a sustainable and mature piece of infrastructure.
As of writing, the current cryptocurrency environment is marked by substantial developments, such as the approval of spot Bitcoin ETFs and anticipated Ethereum ETFs, both of which are increasing institutional interest in cryptocurrency.
However, unlike Bitcoin, Ethereum offers a means of generating yield through supporting the network. The introduction of an Ethereum ETF could make staking more accessible for institutional investors indirectly through a regulated investment, all of which helps secure the Ethereum network and increase the utility of platforms like Lido.
The DeFi sector is also growing very quickly, driven by advancements in layer-2 scaling solutions and sector-specific platforms. Ethereum’s dominance in smart contracts remains unchallenged, with around 57% of the total value locked in the crypto ecosystem on Ethereum.
Lido has carved out a niche in this rapidly changing environment by addressing the liquidity issues associated with traditional staking. Moreover, Lido’s approach and governance structure, managed by a decentralized autonomous organization (DAO), is a community-driven experiment that may prove to be the new standard for decentralized companies.
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