Lido: Everything to Know
By Beluga Research August 9, 2023
- Lido is a decentralized finance (DeFi) platform that offers staking services for Ether (ETH), MATIC, and Solana (SOL) tokens
- Lido works by allowing a user to stake any amount of their tokens to receive rewards for staking
- The user then receives liquid staked tokens, known as stTokens. They are able to access their rewards in real time
- The user can use their stTokens to compound value to their daily staked rewards
Lido is a decentralized finance (DeFi) platform that offers staking services for Ether (ETH), MATIC, and Solana (SOL) tokens. As of August 2023, Lido is a DeFi platform that allows users to stake three types of crypto tokens, ETH, MATIC, and SOL. Staking involves the holding of an amount of cryptocurrency in a digital wallet. The holding of the amount supports the operations of the blockchain network. The reward for staking tokens is additional tokens. Novice users may find the process of staking to be complex and time-consuming. Lido simplifies the process by allowing users to stake their tokens with a few online interactions.
A Brief History
In 2020, a group of developers and industry experts launched Lido. Members of the group included Chorus One and P2P Validator. The group created Lido to address the growing demand for a user-friendly and secure staking solution for Ethereum. Since the launch, Lido has gained significant traction. Lido is the leading platform to stake ETH.
What is Lido?
Lido is a decentralized platform that allows users to stake their three types of cryptocurrency tokens. Lido's goal is to simplify staking and make the process accessible to more users, including those that lack a deep technical understanding of the process. Using Lido involves sending a set amount of one of the three types of tokens to the platform's smart contract. This mechanism handles the staking process for the user. The smart contract then provides the user with staked tokens, such as stETH for ETH. The amount of stETH represents the user's share of the staked Ethereum pool.
Lido allows a user to stake any amount of cryptocurrency. It contrasts with traditional staking solutions that typically require users to hold a minimum amount of tokens. Lido also allows a user to withdraw their staked tokens at any time. The user does not have to wait for a specific lock-up period to expire.
Lido uses a unique staking model known as "liquid staking." This means a user receives rewards for staking their tokens, but the staked tokens remain liquid. A user who stakes tokens can trade their staked tokens on decentralized exchanges or use them as collateral for loans. They do not have to withdraw their tokens from the staking pool.
Lido offers users security through its multi-signature smart contract. The contract requires multiple parties to sign off on any changes to the staking process. This reduces the risk of malicious actors compromising the platform.
- Acquire ETH, MATIC, or SOL tokens. A user acquires such tokens through a cryptocurrency exchange or by receiving them from another user. Once the user has one of the three types of tokens, they can go to the Lido website and connect their digital wallet. Lido currently supports a number of popular wallets, including MetaMask, WalletConnect and Coinbase Wallet.
- Deposit these tokens into the Lido smart contract. Lido then automatically stakes the tokens on the Ethereum, Polygon, or Solana network. ETH tokens are staked on the Ethereum network, MATIC tokens on the Polygon network, and SOL tokens on the Solana network.
- Receive staked tokens of the native cryptocurrency in return . The staked tokens represent the user's stake in the network.
- Trade, loan or retain the staked tokens. The user trades or loans the staked tokens on decentralized exchanges (DEXs). The user can also withdraw their original tokens at any time by burning their staked tokens.
- Earn rewards for staking. The user receives rewards for staking in accordance with the terms of the smart contract.
- Decentralization. Some staking services rely on a small number of validator nodes. Lido uses a large number of nodes to ensure that the network remains secure and resilient. This also helps to prevent any one node from gaining too much power over the network.
- Liquid staking feature. Normally when a user stakes their tokens, the platform locks up the tokens for a period of time. It does not allow the user to access the tokens for other purposes. Lido's liquid staking allows users to trade their staked tokens on DEXs or use them as collateral for loans. This provides users with more flexibility and liquidity than traditional staking.
- Strong focus on user experience and accessibility. Lido is designed to be easy to use. Lido has implemented several security measures to protect users' funds, including multi signature wallets and insurance coverage.
- No Technical Knowledge Required - With Lido, users do not need to have any technical knowledge or experience in running a validator node. This makes Lido more accessible than other staking platforms to a wide range of users.
- Liquidity - A user who stakes their tokens with Lido receives staked tokens of that cryptocurrency in return. These tokens are tradeable on various decentralized exchanges. They provide liquidity to users who need to access their funds quickly.
- No Minimum Stake - Unlike some other staking platforms that require a minimum stake, Lido has no minimum stake requirement. This means that users can stake any amount of ETH, MATIC, or SOL that they choose. This feature of Lido makes it accessible to smaller investors.
- No Slashing Risk - A user who stakes their tokens with Lido does not have to worry about the risk of being slashed. Slashing occurs when a user suffers a penalty for taking action detrimental to the network. Lido uses a decentralized pool of validators to secure the network. Slashing penalties are distributed evenly across the pool.
- Low Fees - Lido charges a low fee of 10% on rewards earned from staking. This fee is used to cover the costs of running the validator nodes and maintaining the network.
- Risk of Centralization - While Lido uses a decentralized pool of validators to secure the network, there is still a risk of centralization. This is because the pool of validators is controlled by a decentralized autonomous organization (DAO). The Lido DAO could become vulnerable to centralization if a small group of individuals came to hold a large amount of the voting power.
- Smart Contract Risk - Lido, as other platforms, runs a risk of having vulnerabilities in its smart contracts. The Lido team conducts rigorous security audits to minimize this risk.
- Limited Control - A user who stakes their tokens with Lido gives up control of these tokens to the network. This is not an issue for some users. Other users prefer to have control over their funds.
- Dependency on its network - Lido is dependent on the performance and scalability of its network. When the network experiences congestion and high gas fees, this impacts Lido's performance.