Lido is a liquid staking platform running on multiple blockchains, allowing users to remain liquid while staking their coins.
The centralized financial system is slowly chipping away with the rise of web3 platforms aiming to transfer decision-making into the hands of the users. While decentralized financial (DeFi) services are still in their infancy and have a series of issues to deal with, they serve as a starting point for an exciting future of community-powered networks.
Table of Contents
Background
Lido, a dominant figure in the Ethereum staking space, was co-founded by Konstantin Lomashuk and was established to repel the growing influence of centralized exchanges. Through blockchain technology, it hopes to continuously democratize the Ethereum network by maintaining a low entry barrier that allows small investors to leverage the web3 giant’s staking opportunities.
What is Lido?
Lido is a liquid staking platform running on multiple blockchains, including the Ethereum 2.0 Beacon blockchain. It allows users to stake their Ether (ETH) assets without requiring them to participate in maintaining the infrastructure and locking them. ETH, for so long, has been receiving criticisms for its inaccessibility, illiquidity, and immovability while staking. Lido intends to address these dilemmas by increasing staked ETH’s liquidity and lowering the requirements for stake participation to strengthen the network’s security.
What makes Lido’s derivatives interesting is that they are liquid, which means depositors have the freedom to use them on various DeFi applications while continuously earning passive income through staking yields. Users’ funds are deposited to Lido’s smart contract, locked in Ethereum’s proof-of-stake contract, and collectively controlled by the signatories selected by the platform’s decentralized autonomous organization (DAO).
Mechanism
Lido offers staked Ether or “stETH” tokens, which are assets that represent staked ETH in the platform. They are pegged 1:1 to the Ether. Depositors can use their stETH like regular ETH to earn lending rewards and yields and are updated daily by Lido to reflect users’ staking rewards accurately.
stETH combines the value of staking rewards and initial deposits without imposing any penalties on the depositors. The system mints these tokens immediately after users’ deposits and burns them when they are redeemed.
Users should also know that Lido requires no minimum deposits, making it easier for more stakers to start immediately with the platform. Another interesting aspect of Lido is that benefits are both ways, instead of just the network getting the bigger advantage. How? By offering users real-time transfer of staking rewards which also helps secure Ethereum even better with fewer risks, giving both sides the benefit they need.
Security
Lido has equipped its staking platform with well-selected security features such as the requirement for committee-elected validators and implementation of non-custodial service. It also has a DAO component for decision-making and continuous review of its codes. These safeguards ensure that Lido can prevent or minimize dangers such as staking and counterparty risks that can negatively impact the network’s users.
Another risk-reducing solution it has is allowing depositors to stake their ETH assets in various validators instead of one to decrease their staking risks. Lido’s smart contracts were also audited by Quantstamp, a leader in web3 security, and Sigma Prime, an information security specialist, ensuring that it has followed all industry standards.
LDO Token
LDO token provides holders with governance rights to the Lido DAO. It is also a MiniMeToken, a cloneable ERC-20 token created to conveniently multiply tokens with a matching balance distribution as their parent token. Holding an LDO token equips users with voting power in the Lido DAO, which can further expand with the increased LDO locked in a depositor’s voting contract. LDO token is available at SushiSwap, Uniswap, Hotbit, Hoo, and DeversiFi.
Lido for Other Blockchains
Lido for Solana
Lido for Solana is a liquid staking protocol built for the Solana network, which Lido’s DAO governs. Participants here will receive a token called“stSOL,” an on-chain representation of their share in the total pool. Lido is currently working to increase the application of stSOL into the Solana DeFi ecosystem to make them as valuable as possible.
The first thing SOL owners must do is link their wallets to Lido’s interface and deposit their Solana-based tokens, which will then provide them with stSOL tokens. After distributing stSOL, Lido’s collected SOL will be distributed to participating validators to increase stSOL’s value further. But how? By delegating SOL, Lido expects these tokens to gain rewards soon and increase the quantity of SOL in its management, which, in turn, will increase stSOL’s value.
Lido for Polygon
Lido for Polygon is a DAO-powered liquid staking protocol created for the Polygon L2 network. Through this, participants can stake their ERC20 MATIC tokens on the Ethereum mainnet, which will instantly offer them “stMATIC,” a representation of their pool share. They can also receive their staking rewards and control their stMATIC tokens simultaneously. This capability helps increase Polygon’s decentralization, security, and stMATIC’s utility.
Lido for Polkadot
Lido for Polkadot, also known as “Lido DOT,” is a liquid staking protocol for the Polkadot blockchain that lets users gain staking rewards minus the need for maintaining staking infrastructure and locking of DOT tokens. When participants deposit their DOT assets, Lido instantly offers them “stDOT” tokens. Furthermore, the exact asset-growing mechanism is in place here, where collected tokens will be distributed to selected node operators to increase the pooled assets.
Risks You Should Expect
Lido, hailed by Fortune magazine as the biggest Ether staking service, remains at risk from virtual dangers despite its multi-level security features. Here are the significant risks that users should know, which can potentially hit even the most secure networks, including Lido.
Beacon’s Technical Risk
Beacon is Ethereum’s new proof-of-stake (PoS) blockchain, and while it’s a welcome transition from its power-hungry proof-of-work (PoW) mechanism, ETH 2.0 is still in its very early operation. And since Lido runs on Beacon, ETH 2.0’s still unseen risks can affect the staking platform directly.
Smart Contract Bug
Any computer-code-based platforms always face the risk of bugs that can compromise its entire operations at any time, and Lido is no different. But its team has already implemented ways to reduce this hurdle by having its code audited and open-sourced. It has also launched a bounty program to minimize any bugs that may still be existing in its system.
DAO Management Risk
During the early phase of Lido, it held a collective asset worth 600k ETH, composed of various accounts supported by a multi-signature threshold to reduce custody risk. While this is a robust security feature, there’s a risk that when a certain number of signatories got hacked, lost their keys, or executed unethical practices, Lido’s funds can possibly be locked.
stETH Price Decrease
It’s also possible that stETH may hit a value lower than its inherent price mainly because of the platform’s withdrawal restriction policies, preventing arbitrage and 0% risk market-making.
Failure to Validate Transactions
There’s a risk that validators may fail to validate transactions, possibly putting the platform’s entire staked funds at risk. To reduce this risk, Lido stakes in carefully-selected professional node operators with a good reputation and heterogenous setups.
Lido DAO
Lido DAO is composed of LDO token holders whose primary responsibility is to vote on critical areas of the network, including selecting oracles and node operators, adjusting fees, and more. The fees collected by the organization go directly to essential areas such as protocol upgrades, insurance, and research and development.
Furthermore, Lido DAO is an Aragon-powered organization, a platform with a complete end-to-end framework that creates tools to enhance decentralized technologies. The DAO uses Aragon’s advanced services as its standard tools to deliver fast and secure service for the network.
Referral Program
Another way for users to earn in Lido is through its referral program, where they can accumulate rewards every time someone uses their referral links. Lido has implemented a new policy where users within its whitelist are the only authorized people who can be part of the program. Everyone inside this list means that Lido DAO approved their inclusion, and any non-members wouldn’t be able to earn from their referral links anymore.
LEGO Grant
Lido Economic Grants Organization (LEGO) rewards users who have contributed to the network’s development through individual initiatives and projects. It offers lucky community members rewards such as bounties, infrastructure support, and developer incentives.
Offering these grants encourages users to be more active and increase their productivity in the platform, which, in turn, helps Lido become a more liquid and secure network. It is consistently looking for innovative ideas from the community to continuously enhance the platform’s efficiency and remain competitive in the DeFi space.
Conclusion
On the one hand, Lido deserves praise for bringing staking closer to small investors by eliminating expensive requirements such as hardware and huge minimum holdings. On the other hand, the large deposits in its platform, worth four million+ Ether, raise a concern about asset concentration, making it vulnerable to cyber risks. With the opportunities and risks involved, it will be interesting to see how Lido can find the right balance between these two aspects to offer both protection and benefits for users in the most efficient way.
It is already a leader in the liquid staking sub-sector, encompassing multiple blockchain native tokens, which means it has the advantage and resources to maintain its position.
