Intro
Staking is one of the most popular ways to earn income from cryptocurrencies. A huge number of investors provide their crypto assets for a certain period of time and receive stable rewards. However, the lockup period makes it almost impossible for them to withdraw, sell or transfer their cryptocurrency while staking. This problem was solved during the advent of liquid staking, which became widespread in 2022 and allows users to withdraw their funds at any time.
With the growing interest in liquid staking, more and more platforms have emerged allowing investors to profit from their crypto assets. Lido is considered to be the most popular liquid staking platform that allows you to stake tokens and earn rewards without having to lock them up. Today, Notum will help you understand the idea of liquid staking, will explain what the Lido platform is, how it works, and how to get passive income with it.
What Is Liquid Staking?
As you know, staking is the process of locking crypto assets in a protocol that helps secure the network and earn rewards. Staking is an excellent option for those users who have unused cryptocurrencies in their wallets, as this investment strategy helps them to receive a stable passive income from their assets. The disadvantage of staking is the need to lock up crypto that cannot be transferred, sold, or exchanged for a certain time. If the user wants to withdraw funds blocked in the protocol, he may face fines and commissions.
Liquid staking is an improved version of traditional staking and does not require users to lock up their assets. So-called providers accept user deposits, use them for staking, and after that, users receive tokenized versions of their crypto. Such tokens can be both used in DeFi protocols and exchanged for those that have been staked. In simple words, instead of locked assets, this type of staking uses liquid assets, which helps users to withdraw their crypto at any time convenient for them.
What Should You Know About Lido?
Lido is a leading liquid staking platform that was launched back in December 2020. The platform helps users to profit from their crypto assets across multiple blockchains without having to lock up the funds. This PoS coin solution supports various layer-1 blockchains. Users can choose one of the following networks:
Network | APR | Amount Staked |
3.8% | $14 billion | |
4.3% | $108 million | |
5.3% | $47 million |
The Lido website also features networks such as Polkadot and Kusama, but “due to the termination of development and technical support for Lido on Polkadot/Kusama, from June 15th/1st, rewards issuance and redemption have been halted” - Lido.
As you know, Lido is a decentralized protocol. Therefore, Lido DAO (Decentralized Autonomous Organization) was created to manage it, which makes decisions regarding operations and helps the protocol remain relevant and transparent. Also, the Lido DAO selects node operators, ensures security, and regulates fees on the platform. A key feature of the platform, unlike its competitors, is that the voting mechanism can be configured and updated independently of other protocols on the blockchain. Thus, Lido DAO can change the management structure on the platform, while its other functions will remain unchanged.
Lido platform statistics
- Total Staked Tokens: $14,161,538,913;
- Total Rewards Paid: $665,822,298;
- Stakers: 345,445.
LDO Token
The governance token for the Lido DAO, which allocates all protocol rights, is LDO, which is also the platform's native token. Each LDO token entitles the user to one vote, which means voting power will be proportional to the share of each token holder in the network. Owners of this token can take part in proposals and important decisions regarding the platform. In this way, LDO holders can literally contribute to the development of Lido.
The LDO token is not only required to pay transaction fees on the platform but also provides users with the ability to stake it on Lido and earn ETH rewards.
How Does Lido Work?
By staking on the platforms, users not only earn income but also contribute to the protection of networks. This is the main principle of Lido - the platform gives users the opportunity to deposit their PoS coins and receive rewards. After depositing funds into Lido, the tokens are placed on its blockchain through a protocol. Also, as you know, the platform eliminates the main problem of staking, namely the locking of assets, which is why many users choose liquid staking with Lido.
After the users’ funds are placed in the Lido smart contract, they receive the so-called stTokens, the amount of which will be equal to the amount of the staked assets, as well as any rewards or penalties. Thus, using Lido, users can either withdraw or exchange stTokens for their own coins at any time. When users want to unstake their assets, stTokens are burned and thus the process of withdrawing funds from a particular network takes place. However, it is important to remember that you will need to wait until the end of the unbonding period.
How to Stake on Lido?
Before you can start staking on Lido, you will need to connect your wallet to the platform. The advantage of Lido is that it integrates with many platforms. Speaking of wallets, it works with popular cold wallets like Ledger and hot wallets like Metamask.
After linking the wallet to the platform, you will need to select the asset you want to stake. If you choose ETH for example, then even before staking starts, the platform will show you the amount of stETH that you will receive (the exchange rate is 1:1), the maximum transaction cost (which is $12.04 for ETH) and reward fee (10% for staking ETH). You will also see some statistics about the asset you have chosen to stake. If you choose ETH, the statistics will look the following way:
After selecting an asset, the staking process on Lido will look like this:
- Stake any number of tokens on the platform and get rewards according to the interest rate for the selected asset.
- After placing your assets, you receive the so-called liquid stTokens, which gives you the opportunity to make real-time profits.
- To increase rewards, you can also use your stTokens on other DeFi platforms and applications, which will also bring you daily profit. Thus, you will earn income not only from your initial assets, but also from the received stTokens.
Thus, the whole process of staking on Lido is simple, convenient, and fast. Moreover, the platform has a FAQ section that will tell you how secure Lido is, what are the APRs for specific assets, how stTokens can be used, and more.
Risks of Staking with Lido
Of course, the use of liquid staking protocols, like any other investment strategy, has its own risks that are also important to consider. The main ones inclued:
Risk of slashing
Liquid staking implies the presence of providers that accept user deposits. Thus, if a particular provider is not reliable or a malefactor, this entails certain risks and the loss of your assets. “Validators risk staking penalties, with up to 100% of staked funds at risk if validators fail.” - Lido.
Smart Contract Security
As with any other platform, there is always the risk of a bug or mistake in the Lido smart contract. Since the platform is decentralized, its source code is open. In addition, Lido is included in the Immunefi bug bounty program which has bounties to minimize this risk.
Asset volatility
Even though tokens most often have the same price, the price of a liquid staking asset is not pegged to the underlying asset. Thus, if there is a liquidity crisis or other unexpected events in the market, assets may lose value. Moreover, the staking price of stTokens may also differ from the original one due to the low market cap.
Although risks and disadvantages exist, Lido DAO strives to minimize them as much as possible. However, regardless of the chosen platform, users will always face minimal risks of volatility, hacking, or market changes that are difficult to control.
Conclusion
Liquid staking is undoubtedly a great investment strategy to allow people to use cryptocurrencies to generate passive income. The ability to withdraw assets at any time makes liquid staking a more attractive alternative to traditional staking, which is also used by investors. Lido, in turn, is a simple and convenient platform that has expanded from liquid Ethereum staking to five networks it supports. The popularity of the platform is ensured by a user-friendly interface, attractive investment opportunities, and favorable interest rates. Despite minimal risk, Lido offers simplified and secure staking with daily rewards, which has attracted more than 300,000 stakers worldwide to the platform. Thus, Lido is a great solution for both experienced investors and newbies who want to start their journey in liquid staking.
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.