- Lido is a DeFi protocol built on top of the ETH 2.0 Beacon Chain. that has stood out for facilitating access to Ethereum staking.
- Lido is a provider of staking liquidity solutions for staked assets and Ethereum and allows users to stake Ethereum without locking up funds.
- Lido currently supports Ethereum, Terra, Solana, Polygon, and Kusama.
Cryptocurrency staking has become one of the leading options when it comes to generating passive income, however, the problem with this option is that, in some cases, the funds are locked for a certain time, along with other problems, making it difficult to retail investor access.
This is where it comes in Lido, a Decentralized Finance (DeFi) platform built on the ETH 2.0 Beacon Chain. In it, users can stake Ethereum without blocking the fundssince they receive 1:1 in the stETH token, which they can employ or leverage in other ways.
Therefore, Lido is a provider of staking liquidity solutions for staked assets and Ethereum. The company was founded in 2020 and quickly reached a Total Value Blocked (TVL) of $13.98 billion USD.
For those unaware, TVL is the total value of crypto assets that have been deposited into a DeFi protocol and has generally become a key metric for measuring interest in the sector or protocol.
As of this writing, Lido has a TVL of US$19.13 billion, ranking second below Curve, according to DeFi Calls.
What’s so special about Lido?
The staking platform, Lido currently supports Ethereum, Terra, Solana, Polygon and Kusama.
Something that differentiates it from other platforms is that It allows users to stake ETH without locking up or maintaining infrastructure, while at the same time engaging in on-chain activities such as lending.
This is critical because, if a person wanted to stake ETH on their own, they would have to lock the funds until the Ethereum 2.0 mainnet launch, not to mention, they would have to lock a minimum of 32 ETH or rely on centralized crypto exchanges. What coinbase or Binance.
Therefore, The platform aims to solve the problems of Ethereum staking, that is, lack of liquidity, mobility and accessibility.
ST Derivative Tokens
By supporting four different blockchains, Lido can integrate various protocols and issue tokens derived from the corresponding blockchains to provide liquidity.
In this way, toBy staking ETH, SOL, LUNA or KSM, users get the same percentage of stETH, stSOL, stLUNA and stKSM token and earn rewards.
Each “st” token is minted at the time of deposit and is burned once it is redeemed. Its value is linked 1:1 to the value of each corresponding token, therefore, these tokens, such as stETH, serve as guarantees to obtain additional yield.
It is important to explain that stETH is the ETH staking on Lido, combined with the value of the initial deposit + staking rewards – penalties.
Unlike other protocols, staking rewards are in the same cryptocurrency that was staked. For example, MakerDAO and Liquity allow users to stake ETH, but the rewards are delivered in their own native tokens, instead of ETH.
LDO Tokens
One last feature of Lido that sets it apart from the rest has to do with the platform’s native token called LDO which is used to vote and govern.
Who is behind Lido?
When describing Lido, it was emphasized that it is a DeFi protocol, that is, it offers financial services in a decentralized way. The question is: What does the fact that it is decentralized consist of?
Lido is governed by a decentralized autonomous organization (DAO). It is a structure intended for the platform to be managed collectively by its members.
Under a DAO, decisions are governed by proposals and votes by ensuring that everyone in the organization has a voice. So unlike any company today, there is no CEO here who can authorize spending or make decisions based on his own best interests.
lido safety
According to its official website, Lido is a safe platform for staking for the following reasons:
- Open source and continuous review of all code
- Committee of the best validators chosen
- Uses of the non-custodial staking service
- Use of DAO for governance decisions and to manage risk factors
One aspect that should be specially emphasized is open source and its review continues. As we have previously explained in Bitcoin Mexico, Smart Contracts usually present vulnerabilities that, if found by computer attackers, could be exploited and lead to losses.
It is precisely for this reason that lidoin his web page, emphasizes that its smart contracts are audited by Quantstamp and Sigma Prime. Also, the fact that Lido uses multiple validators reduces the risks of the “clipped penalties” mentioned below.
there are always risks
Just as a platform must be transparent with its benefits, it must also be transparent regarding the risks that its users assume when using it.
- Risks Inherent in Smart Contracts: Again, vulnerabilities within Smart Contracts may not be found despite audits. Therefore, there is a risk that Lido contains a vulnerability.
- Technical risk of ETH 2.0: Offering a service on a technology in full development, there is no guarantee that ETH 2.0 has been developed without errors. Therefore, any vulnerability that is contained in ETH 2.0 brings a risk.
- Risks associated with possible fluctuations in the price of ETH.
- Among others that are suggested to be reviewed in your official website.
How to use Lido?
We choose the cryptocurrency with which we want to stake: ETH, Terra, SOL, KSM or MATIC. Each one has a different APR. To use Lido it will be necessary to have a DeFi Wallet. For example, MetaMask, Ledger, Coinbase Wallet, Trust. This wallet must be connected.
One aspect to keep in mind is that, depending on the cryptocurrency that we want to stake, the wallets that it supports will be different. For example, with Solana, the options are Phantom, Solflare, Ledger, Sollet, among others. In each case, a wallet must be connected.
Once we have connected the preferred wallet, we will already have a Lido account associated with our wallet. To stake, for example, ETH, we must have funds in said cryptocurrency in the wallet that we have connected, so, previously, we had to transfer ETH to our decentralized wallet. This ETH can be purchased from a centralized crypto exchange like Binance.
Once we have the funds in the wallet, the amount of ETH with which we want to stake is entered in the box. We review the transaction cost and the APR. If we agree, we click ‘Submit’.
An important note is that the transaction cost for staking ETH with Lido is approximately $25 US dollars. Whereas, if Solana is staked on Lido, the transaction cost is less than one US dollar.
Therefore, when deciding which cryptocurrency to stake, it is essential to take transaction costs into consideration.
Strengths and weaknesses
Before entering any DeFi protocol, the strengths and weaknesses of the platform should be taken into account to make the best decision. Not necessarily the platform that works for the majority, will work for a person with specific needs.
Thus, in terms of strengths, Lido is:
- Easy to use
- Offers a single currency staking model
- Flexible
And, as for its weaknesses:
- It has an elastic supply mechanism. This means that when a rebase occurs, the supply of the token increases or decreases algorithmically, based on the staking rewards on the Ethereum blockchain.
- Earnings are not stable.
- Ethereum fees remain an issue on Lido
final thoughts
Lido is one of the many DeFi platforms out there today, but unlike the rest, Lido solves a specific problem for users who want to stake Ethereum: lack of liquidity, immobility, and accessibility.
It is precisely for this reason that Ethereum controls the largest proportion of total value locked on Lido, with $9.689 million dollars staking. In this way, Lido has become one of the main platforms for staking, especially Ethereum.
In fact, recently, data from etherscan revealed that Three Arrows Capital started staking $110 million worth of ETH in Lido liquidity pools.
Likewise, Chris Dixon, a senior executive at Andreessen Horowitz, reported on Twitter that the company invested $70 million in Lido DAO.
“Excited to share that Andreessen Horowitz has invested $70 million in Lido Finance, one of the easiest ways to stake ETH and other proof-of-stake assets.”, he said in Twitter.
The company communicated that its investment decision was based on the fact that Lido succeeds in reducing the strenuous hurdles retail investors face when staking ETH.
In conclusion, Lido focused on solving a problem and that is precisely why today it stands out from other protocols. Still, you can’t lose sight of the risks of this kind of investment. Individual research before making a decision is essential.
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