In Proof of Stake (PoS) networks, users can lock their digital assets through staking to participate in the consensus process and continue adding blocks to the blockchain. Users may be penalized with a removal of a portion of their locked funds if they behave maliciously. This design effectively pulls a large amount of crypto out of the liquid market, potentially increasing the asset’s volatility and preventing stakers from participating in Web3 applications (like gaming, decentralized finance (DeFi), and NFTs) with their staked capital. In exchange for locking their funds and maintaining the blockchain, stakers earn rewards from the network.
But what if staked tokens weren’t fully “locked” and could be used in decentralized applications (dapps)? That is the basis for Lido, a liquid staking solution that operates on smart contract PoS blockchains like Ethereum, Polygon, Solana, and Polkadot. When a user stakes ETH through Lido (rather than directly through the Ethereum blockchain), they receive stETH (staked ETH) tokens in return which are not locked and are freely transferable.
This stETH can then be used to generate rewards in DeFi protocols like Curve and Aave, or for trading on decentralized exchanges like Uniswap. At the same time, it generates steady reward, like staking directly to the Ethereum blockchain. In short: Lido gives users the ability to benefit from staking by earning rewards (less a 10% fee) while avoiding some of the restrictions accompanying traditional staking. Throughout 2022 and into 2023, approximately 30% of all ETH were staked through Lido.
Lido is managed by a decentralized autonomous organization (DAO), which is made up of holders of its governance token: LDO. This token lets members of Lido’s community vote on proposals to add/change node operators and fees set by the service, among other things.
How was Lido developed?
Lido was introduced in October 2020 by Konstantin Lomashuk, Vasiliy Shapovalov, and Jordan Fish. Lomashuk is the founder and CEO of P2P Validator, a non-custodial staking service that was started in 2018 and by 2020 was managing over $4 billion in assets. Shapovalov works alongside Lomashuk as P2P Validator’s CTO. P2P Validator remains a main validator, developer, and operator of Lido.
Jordan Fish, known in the crypto community as “CryptoCobain” or, more commonly as “Cobie”, runs a popular crypto podcast and is an investor in the cryptocurrency space. He published the original introduction to Lido Finance on Medium and was involved in its development before leaving the project c. 2021.
Lido raised over $150 million since its inception, including $70 million in March 2022 from crypto investing giant Andreessen Horowitz.
How does Lido work?
Lido offers a platform that allows users to stake as much or as little crypto as they want, regardless of the minimum threshold required by the blockchain.
For example, Ethereum validators must set up a node, which requires 32 ETH as well as technical hardware and know-how. This minimum amount can be hard for the average user to meet, and Lido’s liquid staking solution lowers the barrier to staking for many casual crypto users.
Staked Ethereum (stETH)
Although Lido supports other chains, its flagship offering is liquid staking on Ethereum. When an Ethereum user stakes with Lido, they receive stETH in return.
This new ERC-20 token can be used like any other token on the Ethereum blockchain. For example, anyone can use their stETH to provide liquidity on the ETH/stETH pool on Curve or use the token as collateral to take out a loan on Aave.
When wishing to retrieve their Ethereum back from Lido, users can burn stETH and redeem the underlying ETH at any point in time.
While the prices of ETH and stETH are expected to be closely aligned, the two tokens are not formally “pegged.” This was especially evident during the collapses of both Terra and FTX in 2022 where the price of stETH dropped below ETH. However, in usual market conditions, arbitrageurs find small differences in the prices between stETH and ETH and trade between the two. This generates profits for traders while keeping the prices of the two assets relatively stable.
Backed by node operators
In order to formally stake the pooled assets from its depositors, Lido uses a core group of node operators. In the case of Ethereum, this means that Lido distributes users’ tokens in 32-ETH batches to all node validators. (In May 2023, there were 30 such validators.) The deposits and withdrawals of user funds are managed by smart contracts.
The Lido DAO is responsible for approving the nodes that power Lido, so these generally must be trusted entities with a history of good behavior as a validator. This reduces the risk of the validator being slashed (having its staked funds taken as a penalty), though this remains a risk to Lido users.
Lido charges a 10% fee on staking rewards, and these are split between node operators and the Lido DAO treasury.
How is the LDO token used?
Owning LDO gives users the ability to vote on proposals to govern Lido through the Lido DAO. For example, the DAO adjudicates which users/entities can become validators for Lido, decides what fees Lido charges to operate, manages insurance and development funds, directs how to allocate the DAO’s treasury funds, and more.
One important way the DAO controls funds is through the Lido Ecosystem Grants Organization (LEGO), which supplies funding for Lido-based development efforts. One LEGO grant was the impetus behind implementing liquid staking on Solana, and many other grants have pushed Lido forward like this over the years.
Token distribution
LDO was launched in January 2021, and it was announced that there was a total supply of 1 billion LDO tokens. At that time, 36.32% of all LDO were unlocked and available to use in the DAO treasury. Investors were allocated 22.18% of all LDO, 20% were given to Lido’s initial developers, 15% to founders and future employees, and 6.5% to validators and signature holders.
Lido essentials
- Lido is a liquid staking solution that lowers the barrier for staking on multiple Proof of Stake blockchains—most notably, Ethereum.
- Throughout 2022 and into 2023, approximately 30% of all ETH were staked through Lido, which returns stETH to users as a liquid token to be used in DeFi, for trading, and other uses.
- LDO is Lido’s governance token, allowing holders to participate in decentralized governance of the platform.
How to buy LDO
You can buy the Lido coin on Bitstamp. Sign up for a Bitstamp account and start trading LDO today!
Note: LDO is not available for trading in the US.
This webpage has been approved as a financial promotion by Bitstamp UK Limited which is registered with the UK’s Financial Conduct Authority. Please read the Risk Warning Statement before investing. Cryptoassets and cryptoasset services are not regulated by the Financial Conduct Authority. You are unlikely to be protected if something goes wrong. Your investment may go down as well as up. You may be liable to pay Capital Gains Tax on any profits you earn.