Lido DeFi Protocol Overview
In 2023, liquid staking has become one of the most popular ways to earn passive income in the crypto space. Since this investment strategy has a low level of risk and does not require active user involvement, it's in demand among both experienced investors and newcomers.
The ability to use staked assets without a lock-in period is also one of the main reasons why users prefer liquid staking over traditional ones.
Lido is a platform that has practically monopolized the liquid staking market, offering users profitable APRs, a simple interface, and an almost automated process of receiving rewards. Today's review from Notum will delve into how the Lido platform works, what advantages it offers, and why you consider investing in liquid staking with Lido.
As liquid staking continues to grow and develop, Lido, as a matter of logic, will also align with this financial trend in the future. Besides, some experienced researchers, such as HashKey, also claim that liquid staking derivatives, and therefore Lido, will soon become the most dominant DeFi sector.
Lido Protocol: The Essentials
- TVL: $16,000,000,000
- Average APY: 5.13%
- Risk Level: Low
- Blockchains: Ethereum, Polygon
- Foundation Date: Oct, 2020
Solana was also available on Lido, but from the 16th of October, 2023, the protocol stopped supporting this network.
Lido protocol dominates the liquid staking market and provides users with the opportunity to stake ETH and MATIC and along with it receive additional tokens (such as stETH) that can be used in the DeFi space. This way, users can earn income from liquid staking while maintaining liquidity and the ability to quickly exchange their funds for other assets.
“By issuing a liquid, tradeable asset, stETH, Lido enables users to utilize their interest-bearing staked ETH as a productive asset in DeFi.” - Mjl.capital
As said, Lido provides users with the ability to place liquidity staking through its platform on Ethereum and Polygon networks. The operating principle of Lido is quite simple: the user deposits an asset, for example, ETH, into the Lido smart contract and receives an additional one (stETH – or staked Ethereum if the user stakes ETH) in return.
The advantage of this additional staked token is that while staking the main asset, the user can still use stAsset in the DeFi space. For example, stETH can be exchanged for the original asset or even sold at the market price of ETH.
One of Lido's main goals is also to maintain security through its distributed validator nodes and governance mechanisms. As known, “Lido operates through a network of node operators who manage the technical aspects of staking and enable users to earn rewards while maintaining liquidity.” - Notum. In addition, protocol users have the opportunity to participate in the governance of Lido through governance tokens, influencing decisions related to protocol updates.
Why Invest in Liquid Staking With Lido?
As you know, users choose liquid staking as an investment strategy for several reasons:
- Increased liquidity. Liquid staking allows users to have access to their crypto assets even while staking, namely selling or trading their stTokens. Moreover, they can also withdraw their funds from the pool at any time, which provides high liquidity compared to other forms of crypto investments.
- Additional tokens and rewards. Besides the main assets that users stake, liquid staking also provides users with additional stTokens that can also be used to earn extra rewards.
- Participation in decision-making. By choosing liquid staking, token holders can usually vote on key issues of the chosen protocol or platform, propose changes, and influence their development.
“Liquid staking enables users to maintain liquidity by participating in staking networks, while still earning rewards.” - Notum
Lido is the best solution for investing in liquid staking since it is the largest player in the crypto investing market. As of November 2023, Lido has over 77% of all staked ETH on its platform. Lido's closest competitor in Ethereum staking is Rocketpool, which has only 8.77% of the market share.
Also, compared to other liquid staking platforms, Lido offers one of the best LSD APR which is 4.00%. Rocketpool, for example, only offers 3.43%.
However, before investing in liquid staking with Lido, remember that it only supports two networks – Ethereum and Polygon. So, if you are interested in liquid staking of ETH or MATIC, Lido will be the best option on the market due to its interest rates, global recognition, and contribution to network security.
Investment Strategies on Lido
stETH - 3.90% APR; Low Risk
LidoFi offers users the opportunity to stake any amount of Ethereum and receive daily rewards for their contribution to network security. When staking Ethereum on Lido, users receive an additional stETH token that represents the staked version of Ethereum. This additional token allows users to use it across the DeFi ecosystem and L2, including exchanging and selling. The protocol currently has over 8.9 million stETH staked and has paid out over 452 thousand ETH rewards.
Since the amount of stETH in balance can change daily due to staking rewards, Lido encourages users to use a wrapped version of stETH (wstETH). The advantage of wstETH is that it keeps your stETH balance unchanged, using a share system for reflecting your staking income.
Lido APR for staking ETH varies around 3-4% on average.
stMATIC - 4.30% APR ; Low Risk
Lido also allows users to stake MATIC while supporting the network and receiving daily rewards. stMATIC tokens represent MATIC tokens staked with the Lido validator node plus staking rewards. You can think of stMATIC tokens as a share of the total pool of staked assets and accumulated rewards. As a result, the price of stMATIC is higher than the price of regular MATIC tokens. You can always unstake stMATIC via Lido and get back your MATIC tokens.
The stToken allows users to place it in the DeFi space to operate in the Polygon ecosystems. At the moment of writing, the protocol has more than 144 million stMATIC staked and has paid out more than 12 million MATIC rewards.
Lido APR for staking MATIC varies around 4-5% on average.
Regardless of which of the proposed assets you choose to stake, the protocol will offer you a simple and convenient Lido staking calculator to understand potential monthly and annual rewards you can receive on the platform.
What Can You Do With stAssets?
As you know, when staking ETH or MATIC, users receive additional stETH and stMATIC tokens, which they can also use in the DeFi space. However, what exactly are the use cases for stTokens?
- Holding tokens. If you don't want to actively interact with stAssets, you can simply store your stTokens in your crypto wallet and accumulate staking rewards.
- Providing liquidity. You can use your stETH and stMATIC for liquidity and exchange them for other assets.
- Decentralized applications. You can use your stAssets in various dApps that support these tokens.
- Sale or Exchange. The advantage of stTokens is that if you wish, you can sell or exchange these tokens at any time.
- Trading. stTokens are also available for trading on various centralized and decentralized exchanges.
- Lending/Borrowing. You can also use stETH and stMATIC as collateral for a loan or lend them out through other platforms.
Is Lido Staking Safe?
Lido is the number one liquid staking protocol recognized by the crypto community, so its use is quite safe. At the moment, Lido offers the largest Ethereum pool in the entire DeFi space, which also speaks of the efficient liquidity and security of the protocol itself. In addition, Lido has a global community that also takes part in updating the protocol and building its future.
The protocol regularly improves security measures to ensure that staking on Lido is as safe as possible. For example, the protocol is open source and regularly checks all code for errors. To avoid the risk of staking, Lido also has the best-elected validators, and the use of DAO for decision-making also contributes to risk management. You can read more about the security of the Lido protocol on their official website in the FAQ – Security section.
Lido has been audited by a large number of platforms, including Certora, StateMind, and Hexens.
However, Lido, like any other protocol, has some risks that should be considered before investing in liquid staking. The main risks of the protocol include smart contract security, splashing, and stToken price risk.
Lido is a unique protocol that has monopolized the liquid staking market and has the largest Ethereum staking pool in existence. Founded in 2020, Lido already has a TVL of over $16 billion and offers a simple and secure way to earn passive income through staking. Lido supports the Ethereum and Polygon blockchains, allowing users to receive rewards for staking ETH and MATIC. Since liquid staking is expected to be a dominant part of DeFi in the future, Lido, as a monopolizer of this strategy, will also remain popular and will most likely offer new investment solutions
The Lido protocol is more popular due to its relatively high APR from 3 to 5%, low-risk level, and low user involvement. However, although Lido offers users increased liquidity, additional tokens and rewards, and participation in decision-making, it only interacts with two blockchains, which should be taken into account before you start investing. However, despite some risks, Lido continues to own the largest part of the market share and is more than twice as large as its closest competitor, which indicates its impeccable reputation and undoubted potential for future development and obtaining new inflows.
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Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.