Lido crypto, also known as Lido Finance, is a decentralized finance (DeFi) platform that aims to bring Ethereum 2.0 staking to the masses. In this article, we will delve into the basics of Lido crypto, explore its key features and benefits and learn how to get started.
So let’s dive in!
- What is Lido crypto?
- So what’s so special about Lido?
- Benefits of Lido
- How to stake your ETH using Lido
- How to make the most money using Lido
- Alternatives to LIDO
- How does staking ETH differ from staking other cryptocurrencies
- How does LIDO maintain the peg between stETH and ETH at 1:1.?
- How does Lido make money?
- Why does Lido get a bad rap?
What is Lido crypto?
Lido crypto is essentially a liquid staking protocol built on top of Ethereum.
That was a mouthful so let me break it down.
Firstly, if you know nothing about Ethereum go and read my tutorial on how the Ethereum blockchain works.
In September 2022 the Ethereum Network upgraded its infrastructure to Ethereum 2.0 to address its scalability issues by transitioning from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism.
This transition is known as the Merge.
In the PoS model, validators check transactions and secure the network by locking up a certain amount of cryptocurrency as collateral and are rewarded for participating in the consensus process.
Ethereum transitioned to PoS because its blockchain was getting clogged.
There was too much demand for its use and transaction fees were sky high.
A Proof-of-Stake system allows Ethereum to scale better.
A secondary reason is that proof of stake is more environmentally friendly as it does not consume anywhere near the amount of energy that Proof-of-Work blockchains like Bitcoin do.
What this means for you is that if you hold ETH you can stake your ETH and earn additional rewards for securing the network.
Lido Finance facilitates staking on behalf of users.
This is not a new concept. There are multiple platforms that allow staking such as Cosmos, Polkadot, and Solana.
So what’s so special about Lido?
What’s special about LIDO is that it allows users to stake their ETH and receive a voucher called Staked ETH (stETH) in return.
This voucher is itself a fungible token. This means you can sell it, transfer it, lend it, put it in a liquidity pool, or do any number of things on DeFi platforms.
Pretty cool huh?
On the one hand, you have locked up your ETH and are earning passive income on it. On the other, you still have the tokenized version of that asset to earn even more passive income.
This is why it is called liquid staking.
Other blockchains don’t have this. Some give you an NFT but that isn’t the same thing. Osmosis, a decentralized exchange, does something similar but not exactly. (You can read about Osmosis here).
Benefits of Lido
#1. Anyone can stake
One of the key advantages of using Lido is the elimination of the minimum staking requirement. To become a validator on ETH you need to stake 32 ETH. In addition, you need to know a thing or two about operating a blockchain node.
But most people don’t have more than 32 ETH and not everyone is a tech wizard.
Lido pools the funds from various users, allowing even those with smaller holdings to participate in staking and earn rewards proportionate to their contribution.
The Lido network also ensures the security of the staked funds. The protocol utilizes multiple institutional-grade custodians to safeguard the ETH, minimizing the risk of loss or theft. These custodians are responsible for the safekeeping of the assets and are required to maintain a high level of security standards.
#3. Ease of use
Lido crypto is pretty straightforward to us. The platform has a simple interface that makes it easy for anyone to stake their ETH.
I also like that they are fully transparent about their fees and that their site gives a good explanation of how they operate.
#4. Your staked assets are liquid
With any other staked crypto you are locking up your digital assets. On LIDO you can continue to use your ETH in the form of stETH. For example, by lending your stETH you can earn additional yield.
#5. No lock-up period:
Lido allows users to unstake their ETH much faster than other proof-of-stake blockchains. Unstaking on LIDO takes anywhere between 5 minutes and 3 days. On LIDO you can unstake ETH in 3 days at a ratio of 1:1. Alternatively, you can unstake by using an aggregator that will unlock in 5 minutes for a 1% fee.
LIDO is an autonomous decentralized organization and has 29 node operators at the time of writing. Their vision is to have more than 5,000 node operators.
These node operators don’t have to follow a mandate from LIDO. Instead, they are free to do as they like.
Having multiple node operators contributes to a blockchain network being more independent as there is no central authority to influence outcomes.
#7. Governance participation
LIDO has a governance token called LDO (Lido DAO Token).
LDO tokens give their holders the opportunity to participate in the governance of the Lido protocol. They can vote on proposals and key decisions that affect the future development and direction of the platform.
In addition, LIDO plans to introduce veto power for Lido users. Should there be a decision that stETH holders don’t like in the future a small minority of 2-5% of votes will be enough to veto a decision.
How to stake your ETH using Lido
Getting started with Lido crypto is straightforward.
To stake your ETH, you simply need to send it to the Lido smart contract address using your wallet.
In return, you receive stETH tokens, which represent your share of the total staked ETH.
These tokens are tradable on decentralized exchanges (DEXs) and can also be used as collateral in lending platforms or yield farming protocols, allowing users to potentially earn additional returns on their holdings.
Here are the steps to follow:
Steps to use LIDO
- Obtain Ethereum (ETH): If you don’t already have ETH, you can purchase it from a cryptocurrency exchange.
- Choose a wallet: Lido supports all the main wallets such as MetaMask, Trust Wallet, Ledger (check out the Ledger Nano S), and Trezor. Choose the one that best suits your needs and set it up.
- Connect your wallet to the Lido platform.
- Stake your ETH: Select the amount of ETH you wish to stake and initiate the staking process. Follow the instructions provided by the platform and confirm the transaction through your wallet.
- Receive stETH tokens: Once your transaction is confirmed, you will receive stETH tokens in your wallet, representing your share of the staked ETH.
- Use your stETH on other DeFi protocols to borrow, lend, and farm to earn additional yields.
It is important to note that there may be gas fees associated with staking and unstaking your ETH.
Gas fees are the transaction fees paid to the Ethereum Network for processing transactions. These fees can vary depending on network congestion.
How to make the most money using Lido
First, move your ETH to Lido. The APR for staking at the time of writing is 3.6%.
In return, Lido will mint an equal amount of stETH in your wallet.
Now there are over 155 DeFi apps you can use to earn an additional return on your sETH. Here are some options
- Use your stETH as collateral to borrow on AAVE.
- Join a liquidity pool on Uniswap or Curve Finance and earn fees and UNI/CRV tokens
- Lend your stETH on MakerDAO and earn a yield.
Alternatives to LIDO
At the time of writing about 20% of the total ETH supply is staked. Out of this 20%, 30% is on Lido.
But Lido isn’t the only way to stake ETH. Lido has multiple competitors.
Here are 4 alternatives to using LIDO
#1. Pooled Staking
Ethereum calls LIDO a pooled staking platform because users can pool their funds to reach the 32ETH threshold.
Other liquid staking services that pool resources are:
- Rocket Pool
- Ankr Staking
Another option is to use a Staking-as-a-Service provider.
A SaaS provider will operate the validator node on your behalf and you just pay them a fee. The difference here is that you need to meet the minimum requirement of 32 ETH to stake.
The benefit of using a SaaS provider is that you don’t need to give up access to the keys that enable moving staked funds. So you can feel slightly more secure about being able to unstake. Whales with large amounts of ETH may care more about minimizing this type of risk.
For those of you with 32 ETH lying around here are the SaaS providers you could use:
- Abyss FinanceSensei Node
#3. Solo Staking
The third option is to operate a node on your own.
But for this, you need to have at least 32 ETH and know how to operate a blockchain node.
Operating a node is hard to do. There are penalties for being offline and you don’t want to be spending your holiday troubleshooting a node that has malfunctioned and needs to update to the latest client version.
#4. Centralized Exchange Staking
The final option is to use a centralized exchange.
Centralized exchanges pool funds to operate a large number of validators. The benefit of using their staking pool is that you can manage your ETH from one place and that you don’t need to worry about managing a wallet and keys.
The drawback of using an exchange is that you don’t manage your own keys (if you care about that) and that exchanges tend to take a higher cut. More like 25% compare to LIDO’s 10%.
Check out how to stake Ethereum on Coinbase for an example.
How does staking ETH differ from staking other cryptocurrencies
- Most other PoS networks allow you to delegate your tokens to a validator. All you need to do is select the validators of your choice. Ethereum is different in that it gets third parties to manage this process. It has no native delegation protocol.
- Other staking blockchains have a longer lock-up period usually 30 days or more.
- None of the other blockchains offer liquid staking. Once you lock up your tokens you don’t get anything in return. UPDATE: Coinbase Wallet issues CBETH if you stake with the Coinbase validator. It’s a similar concept to Lido but they take a large cut of the rewards.
How does LIDO maintain the peg between stETH and ETH at 1:1.?
When asked this question Vasiliy Shapovalov, co-founder and developer of LIDO said that it boils down to the perception of risk.
If you think at any point in time that you won’t be able to withdraw ETH for stETH then the peg could break.Vasiliy Shapovalov, co-founder of Lido
But that is not the case.
At the same time, there is sufficient demand for stETH as you can earn extra yield by plugging into the DeFi ecosystem. For example, you could lock your stETH on MakerDAO and get a yield.
In the past when the peg dropped people started buying stETH at a discount and then just earned rewards as a liquidity provider.
How does Lido make money?
Lido takes a 10% cut of the staking rewards. Out of this half is given to node operators and half goes to the Lido DAO.
Currently, there is a governance process to allow node operators to join Lido. However, in the future they hope to have a more automated way to allow 1000s of operators to join
Why does Lido get a bad rap?
Lido holds about 31% of all staked ETH. Some people feel that this is too much concentration in one entity and that it weakens decentralization.
The thought is that since LIDO is so large it could somehow influence its validators.
Another reason some people are concerned is that while stETH effectively represents ETH it is just an ERC-20 token that lives in a protocol built on top of Ethereum. If anything were to go wrong with that protocol it’s hard to understand what the repercussions might be.
Finally, the fact that Lido is a DAO brings people back memories of the famous DAO, the first DAO ever, that got hacked when the Ethereum blockchain first came about.
The counterargument here is that even if there were to be a hack or some exploit leading to drainage, the staked ETH on the beacon chain is locked. So no one can get to it.
Furthermore, none of the stakeholders above have an incentive to cause trouble. On the one hand they would not want to cause the value of ETH to drop because they hold ETH themselves. On the other they would get penalized through a process called slashing should they try anything funny.
Is LIDO staking worth it?
The current staking yield with LIDO is 3.6% which is higher than what exchanges are offering. Moreover, when you stake ETH with LIDO you get stETH which you can lend in turn to earn extra yield.
Why is Lido so popular?
Lido is a liquid staking solution. This means users can easily stake their ETH and get stETH in return which they could put to other uses. Also, Lido is easier to use than other liquid staking protocols.
Is Lido built on Ethereum?
Yes Lido is a protocol built on Ethereum (ETH). They have also built versions for Polygon (MATIC) and Solana (SOL). They used to offer Polkadot (DOT) and Kusama (KSM) staking as well but as of August 2023 this service has been terminated.
How risky is LIDO staking?
With Lido the biggest risk is that somehow an entity manages to inject a governance proposal that inflates the amount of stETH causing stETH:ETH to depeg.
Who runs LIDO?
LIDO is a Decentralized Autonomous Organization so all decisions are taken by voting on proposals. Lido was founded in 2020 by Konstantin Lomashuk, Vasiliy Shapovalov and Jordan Fish.