Lido DAO Token LDO

All You Need to Kwow About Lido.fi

Lido is a staking solution platform that allows users to stake their assets easily and with no minimum amounts. It offers a variety of chains such as Polygon, Solana, Polkadot, but the main focus is on Ethereum (also layer 2s - Arbitrum, Optimism, etc.). Lido utilizes pooled staking and liquid derivatives to ensure composability with other DeFi protocols.

Staking

Is the process of participating in the validation of transactions on a proof-of-stake (PoS) blockchain. When a user stakes their cryptocurrency, they are essentially holding it in a locked state and committing it to support the network.

In return for their contribution to the network's security and operation, the user is rewarded with staking rewards, which are paid out in the form of the staked cryptocurrency. Staking allows users to earn passive income on their digital assets and can also help to secure the network by ensuring that a sufficient number of nodes are participating in the validation of transactions.

Staking can be done only with native coins (ETH, BNB, MATIC), as they are used to pay for gas fees on that specific blockchain. Fees from transactions are then used as a reward for validators (stakers) of the network. Some projects offer staking of tokens (CAKE, UNI, CRV), which do not have their own chain and therefore can not validate transactions. This type of "staking" is only to ensure that users don't sell their tokens too early.

Lido operates by pooling users' assets together to ensure the minimal criteria for staking are met (32 ETH). The pooled assets are then locked into staking smart contract of the specific blockchain by a network of validators.

Liquid staking

Liquid staking is a type of staking that allows users to earn rewards on their digital assets without having to lock up their holdings for a set period of time. Stakers receive a staking derivative token as a representation of their amount, which can be used in other DeFi protocols to maximize rewards.

With liquid staking, users can choose to unstake their assets at any time, allowing them to retain flexibility over their holdings. This can be useful for users who may need to sell their assets in order to meet unexpected expenses, or who want to take advantage of short-term price movements in the market.

Key differences between staking and liquid staking:

Staking to a validator	Liquid staking
Requires 32 ETH to start	No minimal amount
Single known validator	Staking to a pool of validators, which lido chooses
Unstaking period	No unstaking period
Unused capital locked	Staking derivative put to use

stETH and other staked derivatives

Lido issues a staking derivative of crypto assets called stTokens. When you stake Ether in their pool, you will get the same amount of the stETH token. This token represents your stake, plus the rewards you get over time - the balance is updated every day to accrue the rewards. It is minted upon staking ether and burned when redeemed, so the backing of stETH should remain 1:1 at all times.

Liquid-staked derivatives can be used in various DeFi products to generate yield on top of the staking rewards. Examples include - depositing token on a lending platform and using it as collateral for a loan or depositing to a liquidity pool to earn incentives.

Fee structure

Lido charges a fixed 10 % fee on the staking rewards. That means if the APR (annual percentage rate) is 4,5 % on staking ether - lido will charge 10 % of that 4,5 % reward.
Other fees are mainly associated with the specific blockchain - gas fees.

Security

There are a number of potential risks when using a liquid staking protocol such as Lido. As with every DeFi application, there is a risk of smart contract bugs or malfunction, which can be mitigated by code audits and bug bounties. Lido is open-source and has its code regularly audited.

By selecting and approving validators manually, Lido is prone to centralization. Any validator who works with Lido has to be approved by a committee, making the protocol not fully decentralized. This puts a lot of power into the hands of a single entity and is subjected to a fair share of criticism.

Further, there is a risk of holding a derivative token instead of the token itself. Staked derivatives, although backed 1:1, are still subjected to market conditions. That means the price of such tokens can differ and depeg from the underlying asset according to supply and demand. Depegging can occur when there is a substantial drop/rise of liquidity on one side of the pool. For example, a whale decides to exchange a big amount of stETH for ETH in the liquidity pool - that causes stETH to be less rare in the pool and therefore decreases the price against ETH. 

Lido DAO and LDO token

Lido protocol is managed by the Lido DAO (decentralized autonomous organization). Members of the DAO create proposals and vote on changes to the protocol. Changes can include managing fee parameters and distribution, or addition/removal of node operators. Each vote has a proportional weight to how many LDO tokens the user has. LDO is a governance token of the platform.

Other liquid staking alternatives

Rocketpool - the most decentralized option. Non-custodial and permissionless - anyone can become a node operator. The derivative token rETH accrues rewards over increasing exchange rate.

Coinbase Wrapped Staked ETH - the easiest, but most centralized option. Liquid derivative of ETH staked on the Coinbase exchange (cbETH).

Ankr - similar features to Lido. Active across most well-known DeFi chains. Reward-bearing token ankrETH - does not change quantity like stETH, instead, the value of 1 ankrETH token vs. ETH increases over time.

Key takeaways

• Lido is a liquid staking protocol - enables users to stake with no minimum amount and to unstake anytime.
• Users get a staking derivative (stETH token) according to their amount staked
• stETH is minted when ETH is staked and burned when unstaked - 1:1 backing. The amount rises every day by collecting staking rewards.
• Biggest risk of Lido is centralization - they control a big portion of total ether staked
• DAO members vote on changes to Lido protocol. Voting power is distributed in a form of LDO token.