Key Points

  • Lido is a non-custodial liquid staking protocol (operated according to smart contracts) that has been employed by several cryptocurrencies, including Solana, Ethereum, Polygon, Kusama, and Polkadot.
  • Lido removes the difficulties and risks associated with the maintenance of the staking infrastructure. This is accomplished by enabling users to delegate their digital assets, in any quantity, to professional node operators.
  • To reward their commitment to investing their crypto assets, validators may be rewarded with tokenised, liquid staking derivatives called Lido-staked assets (stAssets). These stAssets, in turn, may be traded or utilised as collateral across many popular decentralised finance protocols amongst validators to earn additional investment yield.
  • The Lido decentralised autonomous organisation (DAO) will hold the voting rights to bring in node operators into the system, who will be responsible for managing the staking process.
  • At the point of writing, Lido is the second largest protocol based on its total value locked (TVL), as well as accounts for nearly one-third of all Ethereum that has been staked.

Staking is a method for cryptocurrency enthusiasts to generate investment yield by agreeing to invest in a specific sum of their tokens. This crypto-economic concept has been in the spotlight in the last two years due to the proof-of-stake (PoS) consensus mechanism emerging as the dominant approach for validating transactions on blockchain networks. In particular, the PoS mechanism contributes to the reduction of energy usage and also enhances throughput by having validators (also known as stakers) commit a certain amount of their crypto assets as collateral when introducing new blocks. As a result, these validators may be rewarded in the future for their risk-taking efforts through receiving a tokenised derivative called Lido-staked assets (stAssets), which comes in the form of either shares or rebase. These liquid staking derivatives, in turn, can be used as collateral on various decentralised smart contracts or be traded.

Nevertheless, the majority of PoS networks possess high entry barriers for prospective validators as the minimum capital requirements to get started with staking are very high. On top of that, various technological complications surround the staking procedure, with extended asset commitment periods causing unwillingness and the lack of buy-in amongst potential validators. Consequently, an entirely new sector known as staking-as-a-service has emerged to offer cryptocurrency investors an easy, flexible, and capital-efficient access point to staking. Lido, in particular, is the current market leader for this sector.

On that point, VALK offers a complete ecosystem of decentralised digital tools to assist crypto enthusiasts in becoming better investors. For example, Merlin, VALK’s Smart DeFi portfolio tracker, can determine the effectiveness of its investment strategy by calculating the total yield and profits earned from a portfolio in USD, providing analysis on major protocols such as Lido.

A Brief Overview of the Lido Staking Protocol

Lido is a decentralised finance (DeFi) application used by numerous cryptocurrency smart contracts. Its DAO was established in 2020 by a team of noteworthy figures and institutions such as ParaFi Capital, P2P Validator, Stani Kulechov (popularly known as Aave), and the Twitter personality Jordan Fish (@cobie). Coincidentally, its launching was only a number of weeks after the creation of the Beacon Chain back in December 2020.

The initial objective of such initiatives was to address a number of issues relating to user experience identified during the Ethereum staking procedure (which involves committing a significant investment of at least 32 Ether upfront until the Ethereum 2.0 blockchain network has been entirely constructed); such as the technical issues surrounding the transaction validation approach. 

In general, the Lido DAO holds the responsibility of governing five different Lido liquid staking PoS protocols, namely Ethereum, Polygon, Solana, Polkadot, and Kusama. Although these networks have significant variations in their design, they still share similar high-level mechanics for their liquid staking protocols to remain compatible.

With that, there are two key groups of stakeholders involved in the Lido liquid staking protocol. The first group would be the users (also known as stakers), whilst the second group are called node operators (or validators). Meanwhile, the main components for such protocol would be the staking smart contracts, the Lido-staked assets (stAssets), together with the third-party DeFi integrations (such as Curve).

Upon accumulating considerable traction, Lido became a multi-chain liquid staking protocol, whereby it became compatible with Solana (September 2021), Kusama (February 2022), Terra (March 2021), Polkadot (June 2022), and Polygon (March 2022). Moving forward, the Lido DAO maintains an interest in diversifying its validator pool by bringing in more legitimate node operators via proper system governance.

How Does the Lido Staking Protocol Operate?

Node operators are fundamentally the individuals taking charge of the actual staking process. At the point of writing, node operators are introduced or kicked out of the system via a voting process within the Lido DAO committee. Considering that Lido is also a non-custodial protocol, meaning that node operators will not be given the privilege to access user funds directly, this means that these individuals will need to use a public validation key to authenticate transactions having staked assets. Thus, as part of ensuring the alignment of personal interests, Lido node operators are rewarded with a commission based on the staking rewards earned from the delegated funds.

On that note, the selection process for prospective node operators begins with the Lido Node Operator Sub-Governance Group (LNOSG), in which applications for such roles open up whenever Lido is developing a new blockchain network or it the LNOSG holds the opinion that an existing network may benefit from having more node operators. To dive deeper into the selection process, the LNOSG assesses node operator candidates based on a number of factors such as but not limited to their track record, reputation, and past works (with particular attention placed on the reliability, security, and originality of their validator sets). Once this step has been finalised, the LNOSG will share a list of shortlisted candidates with the Lido DAO to undergo a token-holder voting process. In this step, much emphasis is typically placed on the candidate possessing a robust validator set, given that earnings and penalties will be even across all stAsset holders in any given liquid staking protocol.

All in all, users delegate their staked assets to node operators via employing Lido’s smart contracts. In particular, these three critical smart contracts are namely the staking pool, the NodeOperatorsRegistry, and the LidoOracle.

To aid investors with committed digital assets to liquid staking protocols, VALK has created a dashboard called Merlin, which provides well-rounded analytics of the investors’ positions. Specifically, Merlin can automatically calculate PNL related to selected protocols such as Lido, Compound, Uniswap V3, and Aave, and provides an overview of positions related to over 2,500 protocols, showing positions and transaction history.

What Are the Advantages of Staking with Lido?

Generally speaking, staking with Lido enables users to stake their crypto assets without needing to interact with other decentralised finance applications. Given that Lido is a non-custodial protocol, this basically means that Lido permits users to retain complete control over the cryptocurrencies they have staked. In other words, Lido users will not need to have a certain amount of their digital assets locked up for a certain period nor face any penalty fees for early withdrawals (unlike other cryptocurrency staking protocols). As a result, the Lido staking protocol provides greater flexibility to stakers in comparison to self-staking or exchange staking.

Not to mention, users have the choice of staking as many or little as they please and earn the corresponding rewards, unlike Ethereum staking protocols that mandate a minimum investment of 32 Ethereum coins. Besides that, users may be able to receive financial rewards every day, with the stAssets being a valuable multipurpose token that can be utilised for yield farming on Curve Finance or as collateral for DeFi loans.

Overall, one may consider participating in the Lido staking protocol as an alternative opportunity that enables users to contribute to upholding the Ethereum blockchain network (as well as the Ethereum 2.0 network) whilst benefiting from relatively lower investment risk. In essence, Lido staking offers beginner users a decent entry point into the world of staking as well as a sweet taste of getting rewarded in stAssets too.

What Are the Risks Linked to Staking with Lido?

Even though the development of the Ethereum 2.0 blockchain network has garnered numerous supporters as well as passionate advocates, there is always the possibility that achieving the vision of this project may face multiple delays, not be implemented according to the official plans, or in the worst-case scenario, not be fully realised. Other than that, as the Lido DAO has broad exposure to the Ethereum blockchain, any challenges or setbacks encountered regarding its execution timeline and/or operations could cause risks to the Lido staking protocol. Nonetheless, assuming Ethereum 2.0 is executed in a smooth manner, Lido will play a central role in the world’s largest PoS blockchain network, thereby enhancing its value and operability.

Not to mention, there are definitely risks associated with employing smart contracts for this system, as all smart contract networks will be vulnerable to third-party hacking or implosions caused by self-inflicted failures. Decentralised finance platforms like Lido are especially susceptible to cybersecurity breaches because these platforms provide exit transactions which, in some instances, could be initiated by permissionless means to their users. Regardless, the Lido staking protocol has been regularly audited by industry veterans in the blockchain network security space, such as the likes of MixBytes, Sigmaprime, and Quantstamp. Thus, users can still retain some degree of confidence in the legitimacy of the Lido staking protocol.

Consequently, if you happen to be interested in potentially participating in the Lido staking protocol, it is strongly advised that you conduct your own due diligence on every cryptocurrency you invest in on top of the decentralised finance apps that you are looking to use. In particular, your research scope ought to cover the degree of vulnerability across different smart contracts alongside the economics of each protocol.

How Can You Start Staking with Lido?

All in all, every cryptocurrency user will just need to follow a few simple steps in order to get started on staking with Lido.

  1. Link your wallet to the Lido app 

First of all, users will have to go to the site “stake.lido.fi” and connect their crypto wallet with the Lido app. Essentially, users will only need to read and agree to the specified terms and conditions followed by clicking on the “connect wallet” button to complete the process.

Meanwhile, it is imperative to bear in mind that users have the choice of selecting any of their compatible wallets. It will be required to possess a certain number of cryptocurrencies in that wallet before it can complete the syncing process. 

  1. Choose the amount of cryptocurrency you would like to stake 

Once you have successfully linked your crypto wallet with the Lido staking DeFi app, you need to pick the amount of cryptocurrency you wish to stake and click to submit. Do also take note certain apps may charge varying transaction fees during this step. Also, there is typically a disclaimer concerning the 10% reward free, in which it would be applied to the monetary rewards earned and not the deposited quantity. In addition, it is also worth noting that the Lido app will reveal the current annual percentage yield (APY), every single detail surrounding your transaction, and the number of stAssets you are eligible to be rewarded with.

  1. Verify the transaction from your crypto wallet

Just before the transaction is finalised, your crypto wallet will instruct you to verify and confirm the completion of your transaction. In this scenario, MetaMask is a popular go-to wallet as users will be able to view every detail of the trade in their digital wallets. 

Concluding Thoughts

Overall, it is no surprise that great responsibility comes with great power. On that note, the Lido staking protocol will play an influencing role in safeguarding the successful development of the world’s largest Layer-1 blockchain directly and indirectly.

With that, the long-term impact of Lido’s central role in the Ethereum blockchain network and the whole cryptocurrency ecosystem will primarily rely on the decisions made by the Lido DAO. Nevertheless, it cannot be denied that the stakeholders in the Lido ecosystem mainly think of the projects in years instead of days or weeks. This thereby suggests a strong projected staying power of this protocol in the future.

If you want to dive deeper into this fascinating space, VALK’s Smart DeFi Portfolio Tracker, Merlin, offers investors a detailed overview of their DeFi positions across different protocols include liquid staking solutions such as Lido Finance. Merlin, in turn, aims to assist investors in monitoring their investment portfolio for the long term.

Frequently asked questions (FAQs)

  1. How do you stake on Lido?

In general, any individual possessing a crypto wallet and specific cryptocurrencies will be able to consider staking with Lido’s protocol. All they need to do is connect their digital wallet to the Lido app, pick the cryptocurrencies they are interested in staking and confirm the transaction from their wallet to the staking protocol.

  1. Is Lido good for staking ETH?           

The Lido staking protocol has been widely acknowledged for the decent rewards it offers users who staked Ether (ETH) over a certain period. As a matter of fact, the Lido staking protocol has been considered a lower-risk alternative to getting started with Ethereum staking whilst contributing to ensuring the security of the Ethereum 2.0 blockchain network. In a nutshell, using the Lido staking protocol to stake Ether can be an excellent way for one to earn passive income from idle Ether coins.

  1. What can you do with Lido-staked ETH?      

When users stake their Ether coins with the Lido staking protocol, the protocol will distribute stETH rewards in a 1:1 manner. This stETH, in turn, can be used as collateral to apply for DeFi loans or be traded for a different crypto asset.