{"id":25364,"date":"2024-06-14T11:43:10","date_gmt":"2024-06-14T15:43:10","guid":{"rendered":"https:\/\/coincentral.com\/?p=25364"},"modified":"2024-06-14T11:43:10","modified_gmt":"2024-06-14T15:43:10","slug":"what-is-lido","status":"publish","type":"post","link":"https:\/\/coincentral.com\/what-is-lido\/","title":{"rendered":"What is Lido: How Liquid Staking is Changing Ethereum"},"content":{"rendered":"

In the constantly evolving cryptocurrency world, staking has become popular for crypto holders to generate passive earnings through staking rewards.\u00a0<\/span><\/p>\n

Yet, traditional staking has significant limitations, like locking up assets for extended periods. This capital inefficiency leaves investors trapped by pursuing yield rather than being able to use their capital to stimulate growth in other parts of the ecosystem and earn yield elsewhere.<\/span><\/p>\n

Enter Lido, a decentralized autonomous organization (DAO) that revolutionized staking by providing a liquid staking service for Ethereum 2.0. Lido’s liquid staking service allows stakers to earn staking rewards while still keeping liquidity.\u00a0<\/span><\/p>\n

It\u2019s a revolutionary concept, but before we discuss how Lido functions, let\u2019s review how staking actually works.<\/span><\/p>\n

Staking 101: A Brief Recap<\/span><\/h2>\n

Staking is a process that allows cryptocurrency holders to participate in network security and earn rewards by locking up their assets for Proof-of-Stake (PoS) chains.\u00a0\u00a0<\/span><\/p>\n

Ethereum (ETH), Cardano (ADA), Polkadot (DOT), Tezos (XTZ), Cosmos (ATOM), Algorand (ALGO), Avalanche (AVAX), Solana (SOL), and\u00a0 Binance Coin (BNB) are all Proof of Stake.<\/span><\/p>\n

First, the user transfers their coins into a wallet that supports staking functionalities. Next, the user locks (stakes) these coins, typically picking a validator node to delegate their stake to. Alternatively, you could run a full node and stake that way, but it\u2019s much more cost-intensive.\u00a0<\/span><\/p>\n

From an outsider’s perspective, staking might seem complex, especially with all the new variations emerging today. The process is actually pretty simple\u2013 a few clicks and you\u2019re staking.\u00a0<\/span><\/p>\n

Cryptocurrencies like ETH generally offer between 3% to 5% APY, whereas others like Polkadot offer up to 15%.\u00a0<\/span><\/p>\n

While staking offers a steady (but not risk-free) yield stream, it also poses several challenges.<\/span><\/p>\n

Traditional staking requires users to <\/span>lock up their assets for a fixed period, making them inaccessible for trading or other purposes<\/b>. This can be a drawback for investors who want to maintain flexibility with their funds.<\/span><\/p>\n

Some staking solutions offered by exchanges or third-party providers come with custodial risks, meaning users must trust these entities with their assets.\u00a0<\/span><\/p>\n

However, we\u2019ll explore some non-custodial means of staking and generating the exact yield\u2013 sans the custody risk.\u00a0<\/span><\/p>\n

Lido as a Solution to Staking Illiquidity<\/span><\/h2>\n

Lido was founded in December 2020 by Konstantin Lomashuk, Vasiliy Shapovalov, and Jordan Fish, known as Cobie.\u00a0 <\/span>Lido has been well-received in the crypto community for its approach to liquidity for staked assets.\u00a0<\/span><\/p>\n

Early supporters and investors included prominent organizations like Paradigm, Coinbase Ventures, and Andreessen Horowitz (a16z).<\/span><\/p>\n

Initially focused on the Ethereum ecosystem, Lido expanded its support beyond Ethereum to include other significant blockchains like Solana, Terra (RIP), and Polygon.<\/span><\/p>\n

It sunset its <\/span>Solana staking service in February 2024<\/span><\/a>.<\/span><\/p>\n

As of 2024, Lido has over $33 billion in TVL and has issued millions of stETH tokens.\u00a0<\/span><\/p>\n

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Lido’s TVL on DefiLlama. (Source: https:\/\/defillama.com\/protocol\/lido#information)<\/figcaption><\/figure>\n

Lido\u2019s Staking Solution<\/span><\/h2>\n

Users who stake their Ether with Lido receive stETH tokens in return and can continue to earn staking rewards while using the stETH as they wish.\u00a0<\/span><\/p>\n

stETH tokens represent their staked Ether <\/span>plus any rewards earned<\/b> and can be traded, held, or used in various DeFi applications.\u00a0<\/span><\/p>\n

stETH and ETH trade around the same price, but stETH\u2019s price is typically a hair higher due to the rewards factoring into its price at issuance.\u00a0<\/span>Each stETH token is a claim to the staked amount of Ethereum.\u00a0<\/span><\/p>\n

How Does Lido Work?<\/span><\/h2>\n

Lido comprises critical components: the stETH token, smart contracts for deposits and minting stETH, a node operator registry, and beacon chain oracles for updating stETH balances.\u00a0<\/span><\/p>\n

Users must deposit Ether into Lido\u2019s smart contracts to receive stETH tokens representing their staked Ether, including rewards minus any slashing penalties.<\/span><\/p>\n

From a technical POV, Lido generally works like this:\u00a0<\/b><\/p>\n