Lido DAO: Everything to Know

By  Beluga Research October 26, 2023

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Summary

  • The Lido Decentralized Autonomous Organization (DAO) is a community that allows users to stake tokens to be used as liquid assets
  • A user receives liquid stTokens when they stake their coins, and can use the stTokens across the decentralized finance (DeFi) environment
  • The LIDO DAO platform decides on the parameters of protocols for liquid staking by having holders of the governance token LDO vote on these measures
  • The advantages of Lido DAO are security, increased liquidity, decentralization and user disadvantages are risk of centralization and market volatility

Overview

Lido DAO: The Lido Decentralized Autonomous Organization (DAO) is a community that allows users to stake tokens to be used as liquid assets.

When users stake tokens, they receive stTokens, which are liquid. Users earn rewards from validating blocks but can sell stTokens at any time when they want to stop staking. When a user unstakes, they burn their stTokens. This removes the stTokens from circulation. The act of burning tokens begins the network-specific withdrawal process to withdraw the balance of their stake and their rewards.

A Brief History

The Lido DAO community was launched in December 2020 as a collaborative effort between several prominent blockchain projects, including Chorus One and P2P Validator. The community became popular because it provided liquidity for staked ether (ETH). Lido DAO's initial implementation utilized a decentralized network of validators to stake users' ETH and generate Lido Staked Ether (stETH) tokens.

Over time, the project evolved to offer staked Polygon (MATIC) and Solana (SOL) tokens. In October 2023, members of the Lido DAO voted to discontinue staking on the Solana platform. Lido DAO also introduced more features, which increased security and decentralization and improved the user experience.

Lido DAO: Everything to Know

  • Staking Process: A user participates in Lido DAO by staking participating tokens. The tokens represent a user's stake in the networks. A user can freely transfer and trade their stETH or Lido Staked Matic (stMATIC) tokens. Lido DAO utilizes a decentralized network of validators to secure stETH and stMATIC and distribute rewards to the staked coin holders.
  • Rewards and Fees: Users who stake through Lido DAO receive rewards generated by the validators. These rewards are distributed in proportion to the amount of the coins that the users have staked. Lido DAO charges a 10% fee on the rewards received. This helps fund the operations and development of Lido DAO.
  • Security and Decentralization: Lido DAO prioritizes security and decentralization to ensure the safety of users' funds. The community relies on a distributed network of validators to reduce the risk of a single point of failure. Lido DAO implemented a robust security infrastructure and auditing processes. These features mitigate potential risks and vulnerabilities.
  • Governance: Lido DAO is governed by the entities that hold the Lido DAO governance token (LDO). Holders of this token make decisions about Lido DAO by voting on what actions the community will take. For example, holders can propose and vote on protocol upgrades and fee adjustments.
  • Integration and Partnerships: Lido DAO has actively pursued partnerships and integrations with other projects in the Ethereum and Polygon ecosystems. Lido DAO participates in decentralized exchanges, lending platforms and other DeFi protocols to provide liquidity.

Getting Started

  • Acquire tokens that are eligible for staking. Tokens include ETH and MATIC. Users can then deposit their tokens into the Lido DAO smart contract. This mechanism acts as a bridge between the staking network and the liquidity pool.

After the tokens are deposited through the Lido DAO smart contract, Lido DAO automatically stakes them on the respective network. Users then receive stETH or stMATIC tokens, which are liquid.

  • Trade stETH and stMATIC tokens. Users can trade the liquid tokens and use them in DeFi applications.
  • Earn rewards. Users earn rewards for staking tokens.
  • Vote on measures for Lido DAO. Holders of the Lido DAO governance token can determine the future of the community.
  • Pay the fee. Lido DAO applies a 10% fee on staking rewards.

Unique Aspects

  • Provides liquidity to staked assets. Staking typically involves locking up tokens for a certain period. The duration can range from weeks to years. Illiquidity prevents token holders from accessing the value of their assets during the staking period. Lido DAO solves this problem by issuing liquid tokens that represent the staked assets. This allows users to freely trade or utilize their stake without waiting for the staking period to end.
  • Decentralized governance model. The DAO is governed by LDO token holders who can participate in decision-making processes like asset additions. This decentralized governance ensures that the platform remains community-driven. It allows stakeholders to have a say in the development and direction of Lido DAO.
  • Prioritizes security and transparency. The smart contracts undergo rigorous audits by reputable security firms to identify and address vulnerabilities. Since the staking process is decentralized, multiple validators can help ensure the security and integrity of the network. The distributed approach mitigates the risks associated with relying on a single validator. It also enhances the overall trustworthiness of the platform.

Advantages

  • Liquidity: Lido DAO offers a way for users to maintain liquidity while their assets are being staked. Lido DAO's issuance of stETH and stMATIC allows users to freely trade, transfer and use their staked assets as collateral for other activities within the Ethereum and Polygon ecosystems.
  • Accessibility: Lido DAO makes it easier for users to participate in Ethereum and Polygon's staking processes. Users do not have to meet the technical requirements and minimum thresholds to stake directly. They can delegate their ETH or MATIC to Lido DAO and receive stETH or stMATIC in return. This lowers the barrier to entry. This feature also allows more users to benefit from the potential rewards of staking.
  • Diversification: By tokenizing staked ETH and MATIC, Lido DAO enables users to diversify their investments. Users do not have to remain locked into a single staking provider. They can provide ETH or MATIC to Lido DAO to benefit from Lido DAO's staking infrastructure. In doing so, users reduce the risk associated with relying on a single validator. This provides users with a more diversified staking strategy.
  • Governance: Lido DAO is governed by its token holders. The decentralized governance model ensures that the interests of the community are represented. It allows for the evolution and improvement of the protocol over time. Participants have the opportunity to shape the future of Lido DAO and contribute to its long-term success.

Disadvantages

  • Centralization Risk: Although Lido DAO aims to decentralize the staking process, there is still a degree of centralization risk involved. Lido DAO relies on a set of trusted validators to secure the staked assets. If a significant portion of these validators act maliciously or suffer from a security breach, this is likely to impact the security and integrity of the staked assets.
  • Problems with Actions of Whales: In October 2023, Lido DAO whales, entities that held a large number of LDO tokens, sold off many of their LDO tokens. This posed a risk to the stability of the platform. It also resulted in a decrease of value for the LDO token.
  • Dependency on Ethereum and Polygon platforms: Lido DAO's success is closely tied to the success and progress of the Ethereum and Polygon platforms. If there are concerns like congestion with these blockchains, these issues affect the functionality and performance of Lido DAO. Vulnerabilities and issues in Ethereum and Polygon can also decrease the worth of the LDO token.
  • Smart Contract Risks: Like any decentralized application, Lido DAO is subject to smart contract risks. While the protocol undergoes rigorous security audits, there is always a possibility of undiscovered vulnerabilities or exploits. Users need to be cautious. They should be aware of the potential risks associated with interacting with Lido DAO's smart contracts.
  • Market Volatility: The value of stETH and stMATIC tokens are subject to market volatility. Fluctuations in the price of ETH or MATIC or changes in market conditions can impact the value of stETH and stMATIC. Users should consider the potential risks and rewards associated with holding and trading stETH and stMATIC.
  • Fee: A user is required to pay a 10% fee on staking rewards.