Lido 101: A complete guide to Ethereum's liquid staking solution

Have you ever wanted to earn staking rewards without the constraints of locking up your assets? If so, Lido might be the answer. It's emerging as the go-to liquid staking solution, witnessing a rise in adoption with over $14 billion in staked tokens by August 2023.

Lido's approach aims to democratize rewards for even modest deposits and provides unparalleled utility without the traditional constraints of asset lock-ups.

In this article, we'll take a deep dive into Lido's ecosystem, Lido DAO, and Lido staked tokens, while also exploring liquid staking.

What is Lido?

Lido is an Ethereum-centric platform designed to transform how we approach staking. Unlike the traditional staking method where assets are locked in and might remain dormant, Lido provides a dynamic avenue where staked assets stay active.

When users stake their ETH on Lido, they receive 'stETH' tokens, which represent their staked assets on a 1:1 basis. This mechanism makes sure assets aren't just sitting idle; they're actively participating in the ecosystem, accruing value, and contributing to network security.

What is liquid staking?

Traditional staking, especially in Proof of Stake (PoS) systems, usually requires committing tokens for a set period, effectively immobilizing them in return for fixed rewards. While this model provides stability, it restricts the liquidity and utility of the staked assets. Liquid staking, as championed by Lido, challenges this norm.

Instead of constraining assets, it transforms them into fungible tokens (like stETH), which can be traded, used as collateral, or engaged in various decentralized finance (DeFi) protocols. This fluidity amplifies the utility of staked assets, allowing holders to gain staking rewards while leveraging them for other rewarding opportunities.

Lido's innovative approach hasn't gone unnoticed. Leading blockchain staking providers, especially from platforms like Ethereum, Polygon, and Solana, have supported Lido. Such endorsements point to Lido's potential in redefining staking tactics and its pivotal role in enhancing the broader PoS landscape.

How do double-dipped yields work?

It may sound like a tempting dessert, but double-dipped yields offer something even sweeter; they can simultaneously earn staking rewards while tapping into other lucrative DeFi opportunities.

Lido offers the ability for users to earn staking rewards without locking away their assets in a static state. It provides a unique blend of asset growth through staking rewards and fluidity, ensuring assets aren't idly lying dormant but are actively engaged in DeFi activities. How's that possible? Through a new class of tokens known as stTokens.

These aren't your ordinary tokens. They represent staked assets on Lido, acting as a liquid proxy for the underlying asset. stETH serves as a liquid stand-in for Ethereum (ETH) staked on Lido, bLUNA is staked (Luna) tokens, and stSOL is staked Solana (SOL) on Lido.

The DeFi advantage of stTokens

The DeFi ecosystem thrives on liquidity and versatility, and stTokens are custom-built for this environment. Here’s why they stand out:

• Liquidity: While your underlying assets are staked and securing their respective networks, the stTokens (like stETH, bLUNA, or stSOL) can be freely traded or used in various DeFi protocols.

• Interoperability: Many DeFi platforms recognize stTokens. This means you can use them as collateral, engage them in yield farming, or leverage them in other financial strategies.

• Continuous rewards: Holding onto stTokens doesn’t halt your staking rewards. The value of these tokens increases over time, reflecting the staking rewards you earn from the underlying assets.

What are the staked Lido tokens, stETH, bLUNA, and stSOL?

stETH (Lido staked Ether)

• Asset represented: Ethereum (ETH)

• Platform: Lido

• Function: For every Ethereum token staked through Lido, users receive an equivalent amount of stETH. This token is a dynamic representation of the staked ETH, reflecting its value and accumulated rewards over time. With stETH, users can participate in the DeFi ecosystem without withdrawing or un-staking their original Ethereum assets.

bLUNA (bonded Luna)

• Asset represented: Luna

• Platform: Terra

• Function: bLUNA is a liquid representation of staked Luna tokens. When Luna is staked, users receive bLUNA, which can then be used within the Terra ecosystem and other DeFi platforms. It allows users to gain staking rewards and simultaneously use bLUNA for various financial strategies.

stSOL (Lido staked Solana)

• Asset represented: Solana (SOL)

• Platform: Lido

• Function: Similar to stETH, holders are rewarded with an equivalent amount of stSOL for every Solana token staked on Lido. This token captures the essence of the staked SOL, granting users liquidity and enabling active participation in the DeFi sphere without un-staking their Solana assets.

Balances and the role of oracles in Lido

The balance of staked tokens, such as stETH, isn't static. As users earn staking rewards, these balances need periodic updating to reflect the accrued rewards.

This is where oracles come into play. Oracles are third-party services that provide smart contracts with external information. In the context of Lido, oracles monitor the rewards generated by staked assets and relay this data back to the platform.

Lido then uses this information to adjust the balances of staked tokens in users' wallets. Oracles are the bridge between the blockchain and the real-world data of staking rewards, ensuring users see accurate, up-to-date balances for their staked assets.

What is the Lido DAO (LDO) token?

Lido DAO, or the Lido Decentralized Autonomous Organization, oversees a liquid staking service built for the Ethereum ecosystem. This service allows users to stake their Ethereum (ETH) tokens transparently, without the need for custody, reinforcing the stability of the broader Ethereum landscape.

Why a DAO?

The dynamic nature of Ethereum requires a flexible system. In its quest to stay ahead of Ethereum's evolving ecosystem, Lido finds its most optimal structure in a DAO. This structure helps to keep Lido agile, making necessary adjustments in response to any changes in Ethereum's protocol.

Lido, being a DAO, also benefits from the transparent management of accumulated fees. These funds cater to developmental and insurance costs, making sure allocations align with the community's best interests.

Key roles of Lido DAO

• Initialization of Lido: This involves the deployment of protocol smart contracts, defining fees and other protocol metrics, and facilitating the secure and efficient creation of staking rewards.

• Adaptation: The Lido DAO is responsible for seamlessly adapting Lido's mechanism in alignment with Ethereum 2.0 updates. This includes the transparent management of funds and revising staking services as needed.

• Stakeholder involvement: Through the Lido DAO, decisions regarding incentives for contributors, the allocation of node operators, and the monitoring of voting parameters are streamlined, all with the goal of optimal staking services.

The Lido DAO continually engages in active voting, assessing parameters like node operator additions and their corresponding validator numbers. These decisions can be observed in real time, underscoring the transparency that defines Lido.

Introducing the LDO token

Lido's mission with its DAO is to democratize decision-making, aiming for a trustless staking service that emphasizes community-driven growth and sustainability. The LDO token is central to this mission, fostering decentralized ownership and facilitating a governance structure where every voice counts.

Owning LDO tokens is akin to sitting at Lido's decision-making table. LDO holders can vote on any of the subjects affecting Lido.

The LDO holder's vote is directly proportional to their LDO holdings. Those with more LDO tokens possess a more influential voice in the voting process. The LDO voting mechanism can be enhanced and modified, just like other facets of the DAO.

How does Lido compare with other staking solutions?

Here's how Lido compares to other staking solutions. While exploring other platforms, it's important to do your due diligence before you decide which platform to stake on.

Rocket Pool

Like Lido, Rocket Pool also offers its own token, rETH, representing the amount of ETH staked in the system. It also serves as a source of staking rewards. Rocket Pool offers:

Pros

• Decentralized staking: A decentralized approach for ETH 2.0 staking.

• Node operator network: Uses a network of individual node operators.

• Open-sourced smart contracts: Uses audited, open-sourced contracts to enhance security.

Cons

• Risk: Users entrust their Ethereum to Rocket Pool's validators, risking potential loss if those validators act maliciously.

• Centralization concerns: Despite its decentralized claim, Rocket Pool relies heavily on a limited number of validators, leading to potential centralization if few validators control a significant stake.

• High fees: There are reports from users that fees can go as high as 20% on rewards.

StakeWise

StakeWise is a staking service provider for Ethereum, offering pooled and solo staking options. With a non-custodial system, it gives users control over their Ethereum. When users stake with StakeWise, they receive sETH2 tokens, which can be used across the Ethereum-based DeFi ecosystem.

Pros

• sETH2 tokens: Users receive these tokens upon staking, and they're usable across the Ethereum DeFi ecosystem.

• Non-custodial system: Users retain Ethereum control without relying on a third party.

• Solo staking option: For those holding 32 ETH or more, solo staking allows staking without running one's own node. It's beneficial for non-technical users with enough ETH.

Cons

• Risk of counterparty involvement: There's potential exposure to counterparty risks.

• Fee structure: The platform charges higher fees than some alternatives.

Frax Ether

Frax Ether launched in 2022, and its appealing functionalities have quickly won over crypto natives. The platform operates within its own Frax ecosystem to enhance yield and streamline the staking experience.

Pros

• Community control: Operates in a decentralized manner, driven by the Frax holder community.

• Stability: Being a stablecoin, Frax provides an avenue for those wishing to sidestep market volatility.

• Efficiency and popularity: It has streamlined the liquid staking system and rapidly gained substantial traction.

Cons

• Market adoption: Frax Ether faces challenges in market risk and mainstream adoption.

• User friendliness: Its interface can be complicated for those new to staking.

For Ethereum staking service providers, Lido stands out for its simplicity, safety, and efficiency. Its significant liquidity provides flexibility within the DeFi ecosystem, distinguishing it as a noteworthy choice for those interested in ETH staking. However, its fees are relatively high compared to some other platforms.

The final word

Lido's pioneering take on liquid staking means assets are no longer tied down but actively flourishing within the broader DeFi landscape. By introducing stETH and other stTokens, Lido replicates the staked assets and keeps them agile, allowing users to integrate with various DeFi protocols seamlessly.

Lido isn't just a theoretical endeavor; it's secured the backing of major staking providers across platforms like Ethereum, Polygon, and Solana. This widespread acknowledgement showcases Lido's transformative potential for staking methods, suggesting its foundational role in sculpting the PoS universe's future.

While traditional staking offers security, Lido bridges the gap between stability and liquidity. The dual advantage of earning staking rewards while diving into other DeFi prospects makes Lido a significant contender in redefining staking's ethos. Lido's approach could set the standard, demonstrating that assets can be secure and versatile in an ever-evolving decentralized finance landscape.

Disclaimer:

THIS ARTICLE IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY. IT IS NOT INTENDED TO PROVIDE ANY INVESTMENT, TAX, OR LEGAL ADVICE, NOR SHOULD IT BE CONSIDERED AN OFFER TO PURCHASE OR SELL OR HOLD DIGITAL ASSETS. DIGITAL ASSET HOLDINGS, INCLUDING STABLECOINS, INVOLVE A HIGH DEGREE OF RISK, CAN FLUCTUATE GREATLY, AND CAN EVEN BECOME WORTHLESS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING OR HOLDING DIGITAL ASSETS IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. PLEASE CONSULT YOUR LEGAL/TAX/INVESTMENT PROFESSIONAL FOR QUESTIONS ABOUT YOUR SPECIFIC CIRCUMSTANCES.