Strengths and Weaknesses
- Staking services for multiple networks, giving users more flexibility to earn yields
- Compounding yields through DeFi options using their staked assets
- Easier ETH staking - no minimum deposit of 32 ETH
- Staked cryptocurrencies are tradable on the open market
- User-friendly interface and accessibility
- Smart contracts audited by quality auditors
- High gas fees while staking ETH
- Users cannot withdraw ETH from staking until the Shanghai upgrade takes place
- Ethereum staking rewards with Lido do not compound
Lido is a secure, easy-to-use solution for earning interest on digital assets through liquid staking. With Lido, assets maintain their liquidity and can be used across various DeFi applications to generate additional yield.
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Functioning of the Protocols
Lido Finance is a decentralized liquid staking protocol that allows users to stake Proof of Stake-based cryptocurrencies. Staking with Lido earns users staked tokens (denoted as st + token name; e.g., stETH for staked ethereum), a freely transferable token that represents their deposit and rewards earned over time. This means that staked assets can still be used in other DeFi applications to earn additional yield.
There are four essential components of the Lido infrastructure, including the staking pool, st[token], DAO, and node operators.
The staking pool is a protocol that manages deposits, staking rewards, and withdrawals, with a separate one for every supported network.
St[token] is a token that represents staked assets in Lido, combining the value of initial deposit + staking rewards - penalties. For example, in the case of ETH, the token will be stETH, which represents staked ETH in Lido. The stETH tokens are minted upon deposit and burned when redeemed. Its balances are issued 1:1 to ETH that is staked using Lido. The token balances are updated when the oracle reports changes in the total stake every day.
To maintain the stETH price peg, Lido utilizes three price stabilization mechanisms. Firstly, users buy stETH when it falls below its price peg, then sell it for ETH, creating an organic financial incentive. Secondly, liquidity mining is used to incentivize investors to deposit both assets into the liquidity pool. Finally, stETH's attractive features, such as its ability to be freely traded while earning staking rewards, make it a great fit for lending protocols like Aave, creating organic demand and helping maintain its price peg.
The stETH token can be used as one would use ETH, allowing you to get ETH staking rewards whilst benefiting from, among other things, rewards across decentralized finance products.
The DAO is responsible for managing the Lido liquid protocol, including picking node operators and configuring protocol parameters.
The Lido DAO is a protocol designed to simplify staking services for PoS networks. It allows users to delegate their digital assets to a trusted and preferred validator, enabling them to earn yield. Lido uses smart contract algorithms to distribute tokens among 29 validators, all of whom are pre-approved by the Lido DAO, and in exchange for sharing their node capacity, they receive 5% of the staking reward from all ETH delegated to them by Lido.
5% of the staking rewards go to the Lido DAO's treasury, while the remaining 90% goes to stETH holders who have staked their tokens using the Lido protocol. The stETH token is freely tradeable and is pegged to the price of ETH. For example, if a user stakes 1 ETH using Lido, they will receive 1 stETH in return.
Node operators are professional staking providers who ensure the safety of funds and validator operations.
While Ethereum is Lido's primary focus, the platform currently supports several other Proof of Stake (PoS) networks, including Solana, Polygon, Polkadot, and Kusama.
How LIDO works
At the moment, Lido offers Staking Services for five crypto assets:
- ETH (Ethereum)
- SOL (Solana Network)
- MATIC (Polygon Network)
- DOT (Polkadot Network)
- KSM (Kusama Network)
Every time you stake a supported crypto asset on Lido, you receive a derivative token with a 1:1 ratio. So, if you stake SOL, you will receive stSOL, and if you stake DOT, you will receive stDOT, and so on. From this moment, you will hold the st[tokens] in your wallet and keep full control over them.
The entire staking fund will be under the Lido DAO (Decentralized Autonomous Organization) management.
While there is no way to withdraw ETH from staking until the Shanghai upgrade happens, stETH holders may exchange their stETH to ETH on liquidity pools such as Curve or Balancer.
To unstake other assets, find the specific requirements and conditions on Lido’s website.
Currently, APRs vary from 5.2% (on Ethereum) to 17% (on Kusama). You can find the current APR on the staking page. APR is denominated in terms of stETH, not USD, and does not represent a guaranteed return or profit.
Node Operators (NOs)
Node Operators manage a secure and stable infrastructure for running validator clients for the benefit of the protocol. They are professional staking providers who can ensure the safety of funds belonging to the protocol users and correctness of validator operations. Those who wish to participate in the Lido protocol as Node Operators, can see all the required steps and conditions to becoming one on the website; specifically, in the section called Node operator manual.
Lido referral program
The goal of the Lido referral program is to increase the security of Solana and Ethereum. The more ETH and SOL that are staked on Ethereum and Solana, the more secure they become. When a user creates stETH or stSOL with a referrer's unique URL, the referrer gets a DAI or LDO token, which can be used to vote on governance decisions regarding the Lido protocol.
The Lido referral committee is made up of three DAO members that oversee applications and decide if an applicant meets the qualifications outlined in the Ethereum and Solana terms and conditions, which have been ratified by the DAO.
Lido collects a percentage of the staking rewards as a protocol fee. The exact fee size is defined by the DAO and can be changed in the future via DAO voting. To collect the fee, the protocol mints new stETH shares and assigns them to the fee recipients. Currently, there is a universal percentage applied to all staking vaults, regardless of which chain you are going to stake on. Lido applies a 10% fee on a user’s staking rewards. This fee applies to staking rewards (earnings) only and is NOT taken from your staked amount. The fee is split between Node Operators, the DAO treasury, and Lido for developers.
The oracle on Lido Finance is a smart contract that keeps track of the balances of the DAO's validators. It is assigned by the DAO and receives daily data that reflects changes in the validators' balances due to rewards or penalties. The data is used to provide an accurate representation of users’ current stETH balance. Whenever there are rewards, a small amount of stETH is minted and distributed to the node operators and the DAO's insurance and development fund, representing a reward fee. The oracle ensures the accuracy of the staking rewards and maintains the integrity of the stETH.
Lido Finance offers a promising staking service with an easy-to-use interface, reasonable fees, generous referral rewards, liquidity for many cryptocurrencies, and support from major players in DeFi. Its liquid staking model allows users to stake their assets and use them in the DeFi ecosystem, while still earning yield on their staked ETH.
LDO is an ERC-20 token that grants governance rights within the Lido DAO, which manages Lido's liquid staking protocol. Through the voting power of LDO governance token holders, the Lido DAO sets fees, assigns node operators, and makes decisions on other key parameters. The DAO is also responsible for accumulating service fees and investing them in research and development, liquidity mining incentives, bug bounty incentives, and general protocol operation.
Holding LDO grants users the right to vote on proposals in the Lido governance forum. The more LDO a user locks in the voting contract, the greater their decision-making power, as the voting weight is proportional to the amount of LDO stake held. The LDO token and its holders govern all Lido DAO governance and network decisions to ensure a decentralized governance structure and protocol stability.
Revenue and Tokenomics
Lido Finance's main source of revenue comes from a 10% fee charged on staking rewards. Of this fee, 5% is directed to the Lido DAO's treasury, which is used to finance various initiatives, including research and development, insurance, and grants. The other 5% is distributed among the Node Operators.
At the center of the Lido network is the LDO governance and utility token, which was launched in January 2021. LDO serves as a governance token within the Lido DAO, enabling token holders to create and vote on proposals. The total supply of LDO is 1 billion tokens, with 844,144,716 currently in circulation. Token allocations include 36.32% to the DAO treasury, 22.18% to investors, 6.50% to validators and signature holders, 20% to initial Lido developers, and 15% to founders and future employees.
The Lido DAO treasury fund is used to support various initiatives, including an insurance fund, development grants, salaries and compensation, legal requests, research inquiries with other protocols, social and marketing campaigns, protocol fees, and liquidity mining events. LDO can be traded on a variety of decentralized exchanges (DEXs), including Uniswap, SushiSwap, 1inch, DeversiFi, Hoo, Hotbit, and Bilaxy, as well as on centralized exchanges (CEXs) such as Binance, KuCoin, Kraken, Gate.io, Bitget, Huobi, crypto.com, and Coinbase Exchange.
The Uniqueness of the Protocol
Lido Finance stands out from the competition in several ways. One major advantage is its unique concept of liquid staking, which allows users to tokenize their staked position and use it in various DeFi applications - even in smaller quantities - unlike traditional staking. This creates a two-way door for staking ETH and offers a more user-friendly experience for retail investors who were previously priced out of staking. With the stETH token, users can earn almost risk-free yield on their staked ETH while also using it for other DeFi activities.
Lido is the leader in on-chain staking services, providing a product comparable or superior to the staking services offered by centralized exchanges. The stETH token can be used in DeFi activities while users still earn yield on their staked ETH. In contrast with traditional staking.
- December - Lido Finance was launched to support the expanding number of PoS networks in the market. The project was founded by Konstantin Lomashuk and Vasily Shapovalov, and its functionality was initially tested on the Goerli test network
- December, 19 - the staking service was launched, and LDO control tokens were issued for voting purposes
- December - the project raised 2 million USD from investors, including Semantic Ventures, ParaFi Capital, Terra, Stakefish, and Staking Facilities. Other notable investors were MakerDAO creator Rune Christensen, Aave head Stani Kulechov, and Synthetix founder Kain Warwick. Subsequently, Paradigm invested 15,120 ETH in Lido, earning 70 million LDO after approval from the DAO
- LDO was launched as an ERC-20 token and became part of the Ethereum ecosystem
In the first 6 months of Lido being live, they reached 500,000 ETH staked in the protocol by June 15, 2021. Just two months later, on August 25, 2021, they reached the milestone of 1,000,000 ETH staked.
- March - Lido raised 70 million USD from Andreessen Horowitz. ETH was the first crypto-asset available for liquid staking through Lido. Despite being operational for less than two years, Lido has experienced substantial growth in total value locked, largely due to an increase in the number of coins staked in its protocols on the Ethereum Network, Terra, and Solana
In addition to simplifying the ETH staking process, Lido's user interface is a highly valued aspect of the platform, an aspect that still represents a challenge when it comes to decentralized applications. Lido's user interface is designed to be intuitive and user-friendly, with clear instructions for staking ETH and other L1 network assets available on the platform. Users can easily track their rewards and other metrics through the dashboard. The interface aims to make staking accessible and straightforward for both experienced and novice users.
The 2023 Road Map for Lido Finance includes the launch of Lido v2, which is the protocol's largest upgrade to date. The two major focal points of this upgrade are the Staking Router and Withdrawals. The Staking Router will enable anyone to develop on-ramps for new Node Operators, ranging from SOL stakers to DAOs and Distributed Validator Technology (DVT) clusters, creating a more diverse validator ecosystem. The Withdrawals upgrade will allow stETH holders to withdraw from Lido at a 1:1 ratio, realizing a key milestone of a truly open on/off-ramping into the Ethereum staking ecosystem. The purpose of this proposal is to drive a more inclusive, open, and transparent platform while building on Lido's core mission to make staking simple, as secure as possible, and to keep Ethereum decentralized and censorship-resistant. The next major upgrade includes the implementation of withdrawals to Ethereum stakers who have supported the network since the first days of the Beacon chain and beyond. The advent of the Staking Router and module-based infrastructure for validator sets will catalyze development, both throughout Lido on Ethereum and externally, through third-party contributors. The implementation of withdrawals and the Staking Router proposal will contribute to an increase in the decentralization of the network, a more healthy Lido protocol, and enable the long-awaited ability to stake and unstake (withdraw) at will, reinforcing stETH as the most composable and useful asset on Ethereum.
In terms of security, the proposal upgrade will be subjected to several audits by independent audit service providers, such as ChainSecurity, Sigma Prime, HEXENS, Osorio, StateMind, MixBytes Camp and Certora. The audits process started in February 2023, with the final protocol upgrade scheduled for March/April 2023. The Lido DAO invites external contributors from all corners of the Ethereum ecosystem to propose Staking Router modules that will be vetted by the DAO. The Lido protocol aims to foster and support external contributors wherever possible.
Lido Finance has been actively pursuing integrations with other DeFi protocols to expand its reach and diversify risk.
Kamino Finance - Lido Finance's partnership with Kamino Finance on Solana allows users to automatically stake their SOL with Solana through Kamino and Lido. This integration expands Lido's reach to the Solana network, and any excess SOL deposited into a position contributes to the decentralization of the network.
Guarda Wallet - Lido DAO is available on Guarda Wallet, a non-custodial wallet that supports over 400K+ cryptocurrencies. This integration provides users with a convenient way to stake, transfer, and exchange LDO tokens.
Citadel.one - Lido has integrated its apps and services such as staking ETH and an exchange liquidity pool on Ethereum, into Citadel.one. This integration allows users to access Lido's services within the Citadel.one platform, without the need to connect to multiple wallets.
Coinbase - Lido DAO's LDO has officially launched on Coinbase, one of the largest regulated crypto exchanges in the US. This integration provides access to millions of traders on the platform, boosting the adoption rate of LDO.
ChangeHero - Lido has integrated with ChangeHero to allow for the exchange of LDO against a wide range of cryptocurrencies.
Optimism and Arbitrum - Lido Finance allows for the movement of staked ETH (stETH) to L2 networks on the top of Ethereum (ETH), Optimism and Arbitrum. This integration allows users to bridge their staked ETH to L2 protocols at the click of a button to benefit from lower gas fees and exciting DeFi opportunities.
These integrations provide several benefits to Lido Finance and its users. By partnering with other DeFi protocols, Lido Finance can expand its reach and increase its liquidity, which helps to mitigate the risks associated with having only one liquidity pool. The integrations also contribute to the decentralization of the network, which is important for maintaining the integrity of the protocol. Additionally, the integrations make it easier for users to access Lido Finance's services and stake their assets without having to use multiple wallets or platforms.
Overall, these integrations represent a significant step forward for Lido Finance in terms of expanding its reach and providing users with more convenient ways to stake their tokens.
Integration with Optimism and Arbitrum
Lido Finance was founded in 2020 by Konstantin Lomashuk, Vasiliy Shapovalov, and Jordan Fish (also known as Cobie on Crypto Twitter), but Fish left Lido in 2021. Lido is a DAO with a diverse membership, which includes Semantic VC, ParaFi Capital, Libertus Capital, Bitscale Capital, StakeFish, StakingFacilities, Chorus, P2P Capital, and KR1. The Lido DAO was initiated by several prominent members, such as Rune Christensen of Maker, Stani Kulechov of Aave, Banteg of Yearn, Will Harborne of Deversifi, Julien Bouteloup of Stake Capital, Jordan Fish and Kain Warwick of Synthetix, Terra, Semantic Ventures, ParaFi Capital, KR1, P2P Capital, Bitscale Capital, Stakefish, Staking Facilities, and Chorus One.
Community and Marketing
Lido Finance has a large and active community, with over 43,000 members on Discord, nearly 13,000 members on Telegram, and more than 128,000 followers on Twitter. While the Discord community is not highly active on a daily basis, Lido's community is engaged on Reddit and Twitter, with a few posts on Medium.
Lido's strong governance process is overseen by the Lido DAO, which makes on-chain decisions. The Lido community is dedicated to addressing the issues associated with initial ETH 2.0 staking, such as illiquidity, immovability, and accessibility. Lido aims to make staked ETH liquid, allowing for participation with any amount of ETH to improve the security of the Ethereum network.
Investors and Partners
Lido Finance has a diverse group of more than 20 investors, who have collectively contributed 145 million USD in total funding. Companies include KR1, Semantic Ventures, Staking Facilities, ParaFi Capital, Stake.fish, Digital Currency Group, Coinbase Ventures, Jump Trading, Paradigm, Three Arrows Capital, Alameda Research, and others. Andreessen Horowitz and Paradigm are two of the most prominent investors, having invested 70 million USD and 73 million USD, respectively.
The Lido ecosystem comprises some of the most well-known DeFi applications in the industry, including Anchor Protocol, Curve, Sushiswap, and others.
Risks and Decentralization
Lido is a non-custodial, permissionless staking service that provides an easy and secure way for users to participate in securing the chain using any amount of capital. It contributes to the decentralization and security of Ethereum (and other chains) by increasing the diversity of the validator set, allowing stakers to control their own ETH. Liquid token, stETH, powered by Lido, also contributes to the DeFi ecosystem. Lido doesn't require stakers to complete KYC verification, and the protocol is working to make the Node Operator vetting process fully trustless. Lido is a non-custodial protocol, which eliminates the risk of censorship or asset freezing. Their vision is to build a staking solution that is fully permissionless and risk-free for the blockchain itself.
Lido’s protocol employs a DAO governance structure, allowing LDO holders to vote on proposed updates and guide the organization's direction. Lido also offers a safe and reliable way to stake crypto assets in a non-custodial and decentralized manner.
However, Lido does come with some inherent risks, one of which is smart contract security, which could potentially expose the platform to vulnerabilities or bugs. To minimize this risk, Lido's code is open-source, audited, and covered by an extensive bug bounty program.
Another risk is the technical uncertainty of ETH 2.0, which could lead to slashing risks and fluctuations in the value of stETH.
In addition, there is an adoption risk associated with ETH 2.0, and a potential loss of DAO key shares could cause funds to become locked. There is also the risk of staking penalties for validators and the possibility of a lower exchange price for stETH due to withdrawal restrictions on Lido.
The Lido DAO is committed to mitigating these risks to the greatest extent possible and remains transparent by communicating them to users. Lido's code is highly regarded as safe and reliable.
Protocol Security and Audits
Lido Finance is considered a secure liquid staking solution for several reasons. Firstly, Lido employs a DAO for governance decisions and to manage risk factors. Additionally, Lido's code is open-source and continuously audited to ensure transparency and reliability. The platform also has a committee of elected, top-quality validators to minimize staking risk. Lido utilizes non-custodial staking services to eliminate counterparty risk, and instead of choosing only one validator, investors can stake across many validators, thereby reducing their risk.
Lido's security and reliability have been extensively audited by well-respected security firms, and the audit records can be found on Github and viewed by anyone. Among recent audits are the StateMind TRP Vesting Escrow Audit Report, which focused on Lido's Token Reward Program (TRP) escrow contracts, and the ChainSecurity Lido Staking Router Audit Report, which focused on Lido's staking router.
Audit companies: ChainSecurity, SigmaPrime, Quantstamp, MixBytes, OXORIO, Statemind.
Lido's Bug Bounties program, offered through the Immunefi platform, allows individuals to report vulnerabilities and potentially earn up to 2,000,000 USD. The program is focused on preventing the loss of user funds, denial of service attacks, governance hijacks, data breaches, and data leaks, and has already paid out 250,000 USD for seven bug bounties. Lido also has separate active bug bounty programs for Ethereum, Solana, Polygon, Polkadot, and Kusama.
Lido Finance provides an appealing option for individuals who are interested in earning from their ETH in the crypto market. Rather than relying on the hope of price increases through holding ETH, users can stake as much or as little as they desire, while still having the ability to use a derivative token elsewhere.
Lido is suitable for various types of crypto investors, such as those who are new to staking and desire a straightforward platform to stake their ETH, enthusiasts who want to learn more about the staking-as-a-service model, and experienced investors who wish to freely transfer their staked ETH across different DeFi protocols.
Due to its reliable foundations, strong ecosystem, and trustworthy community, Lido has become a favored ETH staking platform for both traders and investors. If you are seeking a user-friendly platform where you can stake your ETH, obtain daily rewards, and have the freedom to transfer your staked ETH across different DeFi protocols, Lido may be the ideal choice for you.