One of the most popular financial activities in the cryptocurrency industry is undoubtedly staking. From the investor’s point of view, staking is an opportunity to place your savings in the protocol via a crypto wallet to receive a fixed income over time.
Staking within the framework of the PoS consensus mechanism is an ecological alternative to cryptocurrency mining. Stakeholders help secure the blockchain network and, in exchange, participate in the rewards provided by the network during the transaction verification process.
Although it is one of the most popular DeFi products used by many cryptocurrency enthusiasts, its lack of liquidity is one of the serious problems investors face.
Alternatively, liquid staking becomes an innovative solution to the problems of traditional staking: providing investors with liquidity for their assets while simultaneously receiving passive income.
Simply put, liquid staking allows users to stake their tokens to receive interest at a low-risk level while maintaining their funds’ liquidity for maximum capital efficiency. The market leader in this sector is the Lido protocol, whose accounts have deposited more than $7,478,635,322.
What Is Lido DAO?
Lido DAO is a decentralized autonomous organization that provides liquid staking services. Liquid staking is the best of both worlds: Staking and DeFi, with no unlock periods. Lido DAO was launched in 2020 as a staking solution for ETH 2.0. From its launch to the present day, Lido provides an opportunity to stake ETH tokens on the Ethereum Beacon Chain and receive a representative stETH token, which can be sold, and used in various DeFi protocols to obtain an additional yield and so on. After the launch of ETH 2.0, users will be able to redeem stETH for ETH. A distinctive feature is that the protocol does not impose any limits on the staking account. That is, users can stake any amount.
In 2022, Lido expanded its range of services and now offers liquid staking for Kusama, Polygon, Polkadot, and Solana.
How Does Lido DAO Work?
Using the Lido, users can stake their tokens (ETH, SOL, KSM, MATIC, and DOT) and receive liquid tokens (stETH, stSOL, stKSM, stMATIC, stDOT) pegged 1:1 to the initial stake. The staking reward varies depending on the token:
At the same time, stakers can receive both staking rewards and any rewards received for using their tokens in DeFi applications.
Thus, if you stake ETH in the Lido Ethereum Staking Pool, you receive stETH token in a proportion equivalent to deposited ETH. You can freely use stETH in any DeFi protocol. As already mentioned, users can stake any amount of ETH, not 32 ETH (the minimum amount required to run the validator software). The deposited ETH is formed into chunks of 32 ETH and distributed among active validators responsible for securing the network (data storage, transaction processing, adding new blocks, and so on). Validators receive staking rewards for their activities. Within the framework of Lido, the stakers participate in the so-called pooled staking and are not required to stake 32 ETH. The reward is accrued simply for the fact of the deposit.
Thus, users receive passive income via traditional ETH staking and can use stETH to transfer it to DeFi protocols and use the opportunities offered to maximize their potential rewards. For example, users can use their stETH to participate in Aave protocol, to trade on FTX, to use it in 1inch farming pools, and so on. SOL stakeholders can use their stSOL in DeFi protocols supporting the Solana network, such as Saber, Serum, Orca, Raydium, and others.
Lido DAO Architecture
- Staking pool (protocol for managing deposits, rewards, and withdrawals). The pool is a smart contract in the Lido system. This smart contract is the main element of the protocol and is responsible for all key functions: starting from deposits and withdrawals, ending with receiving information from oracles, and delegating funds to node operators.
- stToken, a liquid staking token that displays the balance of users. stToken is a token that displays staking tokens in the Lido. stTokens are minted upon deposit in the Lido and burned upon withdrawal. stTokens balances are updated daily when oracles generate reports for the past day.
- A decentralized autonomous organization that governs the protocol. According to the developers, DAO is the most suitable governance model for Lido. Users do not have to trust a single centralized center, which significantly reduces the users’ risks. DAO uses the treasury to cover the costs of modernization and development of the protocol. The treasury is formed by the service fees charged for user operations.
All smart contracts in the system are verified by well-known auditors, such as Quantstamp, MixBytes, and Sigmaprime.
LDO token is a governance token of the Lido DAO. LDO token was minted in the amount of 1 billion, of which only 31% (312,951,153.96 LDO) is in circulation. 0.4% of LDO tokens were distributed by airdrop to early Lido stakers. The main purpose of the token is to provide decentralized governance. LDO holders are members of the Lido DAO and have the right to propose and vote for protocol changes. Voting power is determined by the number of LDO tokens in the user’s voting contract. The more LDO in the user’s voting contract, the more voting power the user has.
Liquid Staking Risks
In addition to the benefits of Lido and the maximizing of the capital in our wallets, we must take into account that there are certain risks when using derivative (or synthetic) assets in DeFi:
- It should be noted that users risk losing some of their tokens if the validator fails.
- Strategies like yield farming and loans are very risky. Each increase in leverage entails a greater risk of liquidation when the market makes a sharp turn, which leads to a drop in the value of the derivative asset below the requirements to avoid the liquidation of the collateral.
- Liquid staking on exchanges or centralized platforms may pose a risk under the motto: “no keys, no funds”.
Lido DAO attracts the attention of thousands of traders around the world. To date, more than 150 thousand users participate in the Lido liquid staking. The protocol provides favorable conditions thanks to which users can stake any number of tokens and use liquid tokens to earn a yield on yield.