Staking pool. Protocol to manage deposits, staking rewards, and withdrawals. st[token]. Unlike staked assets, the Lido st[token] are freely transferable instead of locked as in the case of native staking (28 days). Lido lets users operate with staked assets to gain yield on top of yield by leveraging collateral, lending, yield farming, and other kinds of Defi protocols. DAO. Lido liquid protocols management entity, responsible for picking node operators, configuring the protocol parameters and much more. Node Operators. entities that manage a secure and stable infrastructure for running validator clients for the benefit of the protocols. They’re professional staking providers who can ensure the safety of funds belonging to the protocol users and correctness of validator operations.

Problem statement: Traditionally, staking in Proof-of-Stake (PoS) protocol based projects has been about locking one’s assets in one project for a long time and expecting a fixed, predetermined staking reward in return. While it guarantees the return on staked assets much like a bond, it also limits the opportunities of generating higher returns on those assets from the DeFi ecosystem. If you’ve staked all of your crypto holdings, you can’t invest or trade in more profitable crypto pairs on exchanges.

Solution Liquid staking allows using the st[token] in other trading or investing opportunities: Making it possible to earn rewards on as small a deposit as users want (i.e, Ethereum requires minimum 32 ETH staked); Providing the st[token] a building block for other applications and protocols (e.g., as collateral in lending or other trading DeFi solutions). Providing an alternative to exchange staking, solo staking, and other semi-custodial and decentralized protocols.

Background

The Lido DAO was founded in 2020 by a group of prominent individuals and organizations including P2P Validator, ParaFi Capital, Stani Kulechov (Aave, Lens Protocol), and Jordan Fish. The initial goal was to resolve some of the user experience issues in the Ethereum staking process, i.e., the significant upfront capital investment (32 ETH minimum), technical challenges around the validation process, and illiquid funds (locked until after The Merge).

The Lido liquid staking protocol launched a few weeks after the Beacon Chain in December 2020. Lido also continued to diversify its validator set by onboarding additional node operators through governance.

26.10.2020 - Lido announces the launch protocol testnet 13.12.2020 - 16.12.2020 - The Lido DAOs first set of withdrawal keys 28.12.2020 - Lido is live. Stake Ethereum with Lido to earn up to a maximum of 18.10% a year in staking rewards. 28.12.2020 - 20.01.2021 - Integrations across Curve, 1inch, Argent, Uniswap. StEth was added to next wallet: imToken, Trust Wallet, Argent Wallet, Zerion. $LDO was distributed to DAO, developers, backer, holders. Airdop across early Lido stakers, 0,4% of total supply (4m LDO = $3.5 million - $4 million, 1900 - 2000$ per user) 20.01.2021 - 22.02.2021 - LDO was added to the SushiSwap, Harvest Finance. Partnered with Unslashed Finance, insurance protocol. 22.02.2021 - 06.04.2021 - Launched of liquid staking on Terra. Integrated into the Gnosis Safe wallet allowing for direct staking from the security of the Gnosis wallet 06.04.2021 - 14.05.2021 - 10% was diversify for over 30 participants 22.05.2021 - Bug Bounty is live with Immunefi and $2 millions pools 21.06.2021 - Inverse Finance has added support for Lido’s staked stETH, you can deploy your stETH as collateral to borrow assets. 13.07.2021 - Added on Bancor a trading platform 22.08.2021 - Partnered with Ledger, users can use their stETH from wallet 08.09.2021 - Liquid Staking on Solana 01.11.2021 - Integrated to MakerDAO 20.12.2021 - Adopted stETH/USD with Chainlink 18.02.2022 - Liquid staking on Kusama 01.03.2022 - Integrated on Aave a lending platform 02.03.2022 - Liquid staking on Polygon 01.04.2022 - Bug Bounty on Polygon with $2 million in bounties 31.05.2022 - Lido on Polkadot 10.06.2022 - Deployed on The Graph a project which contain instructions how to index contract event 29.07.2022 - Released Lido Node Operator Portal, the purpose of which is to consolidate all information and resources related to being a Lido Node Operator in one place 04.08.2022 - AMM Pools on Polkadot & Kusama deployed

The total amount of Ether deposited to Lido almost tripled from 1.594.816 ETH to 4,144,896 ETH for this year. The total USD value of staked ETH with Lido is now $8.26 billion at time of writing.

The dominanced Lido in Ethereum 2.0 up from 18% in January to 31% in August. Almost 58.7% all staked Eth in this year go to Lido

The number of staker with Lido is up from 33,000 last year to 71.874 today, an increase of 117%

Invest History 15.12.2020 - Staking Protocol raises $2 million from Semantic Ventures, ParaFi Capital, Terra, KR1, Stakefish, Staking Facilities. Anges investor including Rune Christensen (Founder MakerDAO), Stani Kulechov (Founder Aave) and Kain Warwick (Founder Synthehix)

05.05.2021 - Staking project raises $73 million. The funding was led by crypto venture capital firm Paradigm, which bought $51 million worth of LDO tokens from LidoDAO's treasury by paying the amount in 15,120 ETH (1 LDO = 0.73$, 1 year lock-up and 1 year vesting)

The rest of the amount, i.e., $22 million, was contributed by a range of investors, including Coinbase Ventures, Three Arrows Capital, Jump Trading, Alameda Research, Digital Currency Group, and several others. (1 LDO = 0.73$, 1 year lock-up and 1 year vesting)

03.03.2022 - Andreessen Horowitz invests $70M in Ethereum staking protocol Lido. (1 LDO ≈ 2$)

How Lido Works?

The two main parties involved are the users (stakers) and node operators (validators). The key protocol components are the staking smart contracts, the tokenized staking derivatives (stAssets), and the external DeFi integrations (e.g., Curve).

Node Operators The first critical component of a liquid staking protocol is its node operators because they are responsible for the actual staking. As of now, node operators are added and removed through the Lido DAO.

Protocol has three main smart-contracts

1. NodeOperatorsRegistry - holds the list currently node operators

2. Staking Pool - is the protocol’s main contract. Users interact with it by depositing and withdrawing their cryptocurrency and minting/burning stAssets. This contract is also responsible for distributing fees to the Lido DAO treasury and node operators

3. LidoOracle - is responsible for keeping track of staking balances. This contract distributes 10% of the net staking reward a proportional amount: 5% goes to validators (nodes operators) and 5% to the Lido Treasury. The remaining 90% rewards go to holders stEth

DeFi integrations The famous strategy so far has been borrowing to get further leverage on stEth. An example is leveraging stEth on Aave. which allows users to borrow up to 70% of collateral value. Repeatedly borrowing ETH and then resupplying stETH under this parameter allows users to triple their staking rewards, albeit with added risk to themselves and stETH.

As shown below, since integration at the end of February 2022, there has been a significant increase in stEth on Aave. At the present time, almost 40% stEth of the circulation (1 million stEth) are hold in Aave. The second largest pool of stEth provides liquidity is Curve with pair stEth:ETH (25%). Together, almost two third (65%) of stEth are distribute between two protocols

Competitive scape: Lido has over 90% market share in the non-custodial, decentralized liquid staking category. The next closest competitor, Rocket Pool, launched since November 2021. Rocket Pool’s market share in non-custodial liquid ETH staking still remains 5%

The biggest difference between Rocket Pool and Lido is the validator set. Lido’s approach concentrates validators with professional, carefully selected node operators. Rocket Pool’s goal is to allow permissionless entry into the validator set and to secure stake through economic incentives rather than reputation/past performance. While Rocket Pool’s system does lead to wider participation in the validation process, it also creates capital inefficiency (i.e., requiring node operators to put up 16/32 ETH for each validator), which makes scaling a challenge. Another major difference between the two protocols is around liquidity. The Lido DAO currently spends over 4 million LDO per month to incentivize liquidity across chains and their respective DEXs, with the vast majority of spend on the stETH:ETH pair. Rocket Pool, on the other hand, has no spend allocated towards liquidity. Lido’s incentive system boosts demand for stETH by simultaneously reducing slippage and creating a sort of “built-in”, base yield for stETH holders.

The other major player in liquid staked ETH is Binance. Binance, however, is not a direct competitor given its custodial nature. And, while it does issue a liquid tokenized derivative (bETH), the token doesn’t accrue value when outside of the staker’s Binance wallet, making it considerably inferior to stETH and Rocket Pool’s rETH. bETH also lacks critical mass in terms of DeFi integrations.

Considering that all assets are unlocked only after Ethereum Merge, assets trade win small depeg. 1 bETH / stEth / rEth = 0,96 ETH

LDO token: LDO is the Lido DAO’s ERC-20 governance token. Lido DAO is an Aragon organization (communities: Aave, Curve, Decentraland), responsible for making decision around the DAO itself and the staking protocols

The distribution breakdown of the initial supply: 36,32% to DAO treasury 22,2% to early investors 20% to initial developers team 15% to future employees 6,5% to validators and withdrawal key signers

These groups were given roughly 64% of the total supply, with a 1-year lock, followed by a 1-year vesting period. The token generation event (TGE) took place on December 17, 2020; thus, these tokens will fully vest by December 17, 2022.

Closing Thoughts Given the strong dependence of Lido DAO on Ethereum, any delay in the timing or execution of the Merge could be catastrophic. While the deep discussion around Ethereum 2.0 goes beyond, adverse events, such as further delays with the transition date or a crisis of confidence around the transition itself, can lead to a discount of ETH:stETH. Given the re-sale of stETH, cascading liquidations could put further downward pressure on the price. However, if the merger goes smoothly, Lido will play a central role in the largest PoS network. While Lido has a trailblazer advantage over competitors such as Rocket Pool, the set of operators of small Lido nodes has raised concerns about centralization in Ethereum, which has led to the creation of a system in which 29 professional node operators manage a 32.5% share of ETH Lido in the Beacon Ethereum chain.