- Staking with Lido Finance: Lido Finance, a non-custodial DeFi platform, offers liquid staking services through smart contracts. You can earn approximately 4% annually by participating in Lido’s staking, and it’s open to both large and small investors.
- Liquid Staking Explained: Liquid staking with Lido means you don’t have to lock up your assets for extended periods. Your staked tokens remain liquid, allowing you to access them when needed.
- Risks and Rewards: While Lido offers several advantages, it’s essential to be aware of potential risks, such as smart contract vulnerabilities and slashing penalties.
- Investment Viability: Based on factors like a high TVL, a stable stETH peg, and a relatively low risk score, investing in Lido Finance is considered a sound and secure option, offering a 4% return in the ever-changing DeFi landscape.
Staking on the Blockchain
Are you familiar with staking on Proof-of-Stake (PoS) blockchains? This is the core concept of the well-known DeFi platform we’ll discuss today – Lido Finance. It’s worth noting that, according to the latest data from DeFiLlama, Lido has the highest Total Value Locked (TVL) among all DeFi protocols. But first, let’s start by defining what blockchain staking entails.
Staking is a process where you delegate your coins to the blockchain’s validators or become a validator in order to enhance the security of the blockchain and validate transactions. In return for your active participation, you’re rewarded by the blockchain system with its native coins.
Understanding the mechanics of staking can be challenging, so let’s draw a parallel from everyday life. Let’s shift our focus to New York City, a place often synonymous with yellow taxis. Despite New York being a vast city, many people there are willing to work as taxi drivers. Because of that, the city government took measures to regulate and restrict the number of taxis by issuing a permit known as a TLC license. Obtaining such a license is a complicated task due to its limited availability.
However, let’s consider a scenario where you’ve inherited this license but have no intention of pursuing a career as a taxi driver yourself. To prevent this license from going to waste, you decide to lease it to another taxi driver. In exchange, they’ll pay you a percentage of their monthly earnings for the privilege. Staking operates similarly. To prevent your tokens from idly sitting in your wallet, you may consider delegating them to blockchain validators. These validators will utilize your assets to validate blocks, collect transaction fees, and then share a portion of their profits from these fees with you.
But while staking may provide you with a consistent income stream, some blockchains have a significant entry barrier. To illustrate, consider staking on Ethereum, where you must possess a minimum of 32 ETH. As of late summer 2023, this equates to an investment of over $50,000 that not all of us have or would be willing to invest in staking. On the other hand, nearly all blockchains implement a lockup period, which typically spans from several days to several weeks. It means that if the lockup period for your staked assets is 20 days, you can’t access your tokens for 20 days from the moment you invested.
To address these issues, a more advanced version of traditional staking was developed: liquid staking. Liquid staking is favored by many DeFi enthusiasts because it enables you to delegate any amount of your coins without locking them up for an extended period while still maintaining profitability. Lido Finance, one of the leading platforms in this domain, is a prime example. Today, we’ll delve into the details of this platform. Let’s get started!
What is Lido Finance?
Lido Finance is a non-custodial DeFi platform that offers liquid staking services through smart contracts. As of the time of writing, Lido supports liquid staking on several blockchains: Ethereum, Polygon PoS, and Solana, with Ethereum being the primary and the most popular option. Therefore, the guide will primarily focus on Lido Finance‘s Ethereum-based staking. By participating in Lido’s staking, you can earn an annual yield of approximately 4% paid in ETH. But how does Lido Finance generate profits, and how does it work?
How Does Liquid Staking on Lido Finance Work?
In the liquid staking process, Lido Finance acts as an aggregator. First, you delegate your ETH holdings by using a non-custodial wallet to Lido via their official website, and your coins are placed in the platform’s shared “staking pool.” Subsequently, the aggregated capital from all staking participants is delegated to Lido’s validators or validators from its partners. These validators actively support the Ethereum blockchain by validating user network transactions. In return, the blockchain rewards these validators (also called “node operators”). The rewards earned are then distributed among staking pool participants based on their contributed shares, with Lido retaining 10% of all rewards.
What’s noteworthy here is that you aren’t required to become a validator or invest significant funds for liquid staking. Instead, you invest and receive a share within Lido’s staking pool. However, there’s an important aspect. Traditional staking involves locking your assets for an extended period. This locking mechanism can pose an issue if you require access to your assets at a particular moment.
For instance, imagine a scenario where a market crash occurs, and you urgently need to sell your ETH. However, you may find yourself unable to do so because your ETH is locked within a blockchain validator. And you’ll regain access to your tokens only after the predetermined lockup period expires, and by then, it may well be too late. Lido Finance addresses this concern by offering liquid staking, allowing you to utilize your funds while simultaneously earning staking rewards. But how does this work? Let’s delve into the details.
Lido Tokenomics
Lido Finance offers a unique way to interact with your ETH holdings. When you send your ETH to the Lido Finance platform, you receive stETH tokens in return. These stETH tokens represent your staked ETH and are issued by Lido itself. It’s important to note that ETH and stETH maintain a 1:1 relationship, meaning that stETH always holds the same value as the original ETH.
Understanding stETH
So, stETH is a rebaseable and liquid ERC-20 token that provides proof of your staked ETH. The rewards for liquid staking are accrued in the form of stETH. To illustrate, let’s consider a scenario: Suppose you staked 1 ETH through Lido protocol one year ago and received 1 stETH in return. Over this year, you hypothetically earned a 4% profit on your staked ETH. This profit is credited daily to your stETH holdings, also in the form of stETH. Consequently, you will have 1.04 stETH in your wallet after a year.
Versatility of stETH
Beyond its role as proof of staked ETH, stETH offers versatility. You can exchange stETH for other tokens, although it’s important to note that you will no longer receive the staking rewards because you will no longer possess stETH. Additionally, you can move stETH between different wallets or reinvest it in other DeFi protocols – lending stETH on the DeFi lending platforms or providing liquidity to liquidity pools, thereby generating additional income from your staked assets.
However, there is a challenge when it comes to reinvesting stETH in specific DeFi projects. Many DeFi platforms do not support rebaseable tokens, which means that if you delegate your stETH to such a platform, there’s a risk that your staking rewards will not be credited appropriately. To address this issue, Lido protocol has developed a solution called wstETH, which stands for wrapped staked ETH. With wstETH, you can confidently invest in DeFi without worrying about wasting your staking rewards. You can quickly wrap your stETH into wstETH and vice versa directly on the Lido platform.
Taken from Lido
Lido's Governance Token - LDO
But wait, there’s more! Lido Finance introduces a third token known as LDO. LDO is the native governance token of Lido and grants you the power to participate in crucial votes that shape the future of the Lido platform. These votes are conducted within the Lido DAO (Decentralized Autonomous Organization), a separate entity closely tied to Lido’s ecosystem.
Lido DAO
In addition to the core element of Lido Finance, the Staking service responsible for implementing the concept of liquid staking, as described earlier, there is another vital structure known as Lido DAO. Lido DAO operates as the central governing body of Lido Finance, orchestrating its various functions. The responsibilities of the DAO encompass:
- Controlling Validators: Lido DAO oversees the validator nodes within the network.
- Bug Bounty Program: It manages a bug bounty program to ensure the security and reliability of the platform.
- Development and Updates: Lido DAO plays a pivotal role in the continuous development and updating of Lido Finance, ensuring it remains at the forefront of DeFi innovation.
- Receiving and Distributing Service Fees: It handles the collection of service fees and their equitable distribution.
Lido DAO significantly charts the course of Lido’s evolution. However, a key point to note is that Lido DAO isn’t under the exclusive control of its founders; instead, it’s governed by blockchain users holding LDO tokens in their wallets. When Lido DAO initiates a vote, whether regarding updates or validator management, every LDO token holder possesses the right to cast their vote. Notably, the weight of your vote is directly proportional to the amount of LDO tokens held in your wallet.
Armed with this fundamental understanding of Lido and Lido DAO, you might be wondering – is it a worthwhile investment? To assist you in making an informed decision, we’ve compiled a list of crucial factors to consider before investing in Lido Finance.
Important Aspects to Consider When Investing in Lido
Before making any investment, conducting thorough research is essential. So, let’s now examine the pros and cons of investing in Lido Finance and then conduct a comprehensive analysis to determine Lido’s investment potential.
Pros of Investing in Lido Finance
Why should you contemplate investing in Lido Finance? Here are some compelling reasons:
- Decentralized Operation: Lido operates fully decentralized, ensuring your funds remain secure with no third-party access.
- Flexible Investment: Unlike some other staking options, the Lido protocol doesn’t impose a minimum requirement. You can invest as much or as little as you like, even if it’s just a few dollars.
- Easy Staking: Staking with Lido is a hassle-free process. You won’t need specialized equipment or technical knowledge to run a node; Lido charges a 10% fee and does the technical part by itself. All you need is your initial capital.
- Enhanced Returns: When you stake your ETH with Lido, you receive stETH tokens in return. These tokens can be further invested in various DeFi projects, offering additional returns alongside your liquid staking rewards.
- Leading DeFi Platform: As of our latest data, Lido holds the top position in terms of Total Value Locked (TVL) among all DeFi platforms, boasting an impressive $14.67 billion. According to Dune Analytics, a substantial 32.4% of all staked ETH is staked with Lido.
Taken from Dune
- Robust Ecosystem: Lido has forged strong partnerships with major DeFi companies and platforms, including popular wallets like Metamask, Trustwallet, Ledger, Zerion, Coinbase, and others. It also collaborates with lending and liquidity mining platforms and portfolio trackers. Chainfulness is another notable supporter of Lido.
- Security Measures: Lido places a significant emphasis on security. The platform operates a bug bounty program, has successfully passed audits conducted by reputable firms, and has maintained a clean security record, having experienced no hacks or exploits to date. According to DeFi Safety, Lido scores an impressive 92% on its risk assessment, underscoring its focus on the safety of its smart contracts.
Taken from DeFi Safety
- User-Friendly Interface: Lido’s user-friendly interface is designed with customers in mind, providing an accessible and expert-backed platform.
Taken from Lido
Cons of Investing in Lido Finance
While there are numerous advantages to investing in Lido Finance, it’s essential to be aware of potential risks. Here are some considerations before investing:
- Smart Contract Risk: Lido operates using open-source smart contracts. If a hacker discovers a code vulnerability, the smart contract could be exploited, resulting in the loss of investors’ funds. However, it’s worth noting that Lido protocol strongly emphasizes security, as evidenced by its audit data.
- Slashing Penalties Risk: Funds contributed by Lido’s investors are directed to Lido’s validators, responsible for the staking process and earning blockchain rewards. If validators fail their duties, the blockchain may impose slashing penalties, reducing investors’ rewards.
- Derivative Token De-Peg: When you stake your ETH, MATIC, or SOL, Lido issues derivative tokens such as stETH, stMATIC, and stSOL. These tokens are intended to maintain a 1:1 peg to their original tokens. However, this peg depends on Lido’s stability. If unforeseen circumstances affect Lido, these derivative tokens could lose their peg (i.e., the value of stETH will be much lower than the value of ETH).
It’s important to note that while these risks are more theoretical and Lido protocol has not experienced significant security breaches or substantial de-pegging of derivative tokens in its history, it’s always prudent to have a DeFi risk management strategy in place when investing.
Investment Viability
Now that you have familiarized yourself with the pros and cons of Lido, it’s time to summarize and determine if investing in staking through Lido Finance makes sense. Here’s the analysis:
1. Risk Score – 92 (according to DeFi Safety). This rating indicates that the technical aspects, particularly the smart contracts, have undergone thorough audits and are in good standing.
2. Lido was launched in December 2020. The fact that it has successfully navigated a significant period without critical issues is a notable advantage.
3. Total Value Locked (TVL) – $14.67 billion (according to DeFiLlama as of the end of summer 2023). Lido boasts the highest TVL among all DeFi platforms, signifying substantial trust from other investors.
4. Supported blockchains: Lido Finance adapts to the dynamic DeFi landscape by offering liquid staking services on multiple PoS blockchains. Lido supports liquid staking across various blockchains, including Ethereum, Polygon PoS, and Solana, providing users with diverse options to maximize their profits.
5. Investments in Lido can be insured. InsurAce is a reputable platform that offers coverage for DeFi investments on Lido (limited to Ethereum and Polygon blockchains). The insurance costs 0.0077% daily, approximately 2.8% annually. So, in case of an exploit, this insurance can partially reimburse your investment. However, given the current percentage that can be earned on Lido, purchasing insurance may not be very profitable, as it could result in minimal earnings.
Taken from InsurAce
6. LDO DAO token: LDO is the native token of Lido, which ranks among the top 50 coins and tokens by market capitalization. While LDO has recently shown a decline in price compared to the overall market trends, this should not deter you from considering an investment in Lido Finance.
7. stETH peg remains stable. stETH has maintained a stable peg to ETH over the past year, as the chart below indicates. The prices of stETH and ETH have remained closely correlated. While there is a theoretical risk of decoupling, there have been no observed instances to date.
Taken from TradingView
8. Lido offers the opportunity to generate additional income in DeFi. The stETH received from staking ETH can be reinvested in DeFi, potentially yielding a minimum of 3% (even with a conservative reinvestment strategy, such as lending), in addition to staking rewards.
Considering these factors, it is reasonable to conclude that Lido presents a sound and relatively secure investment option. With profits decreasing in other DeFi strategies due to the extended crypto winter, a 4% return with Lido offers an attractive option. Furthermore, Lido’s demonstrated safety and performance, as discussed throughout this article, add to its appeal. The ultimate decision, however, remains yours.
Final Thoughts
In conclusion, Lido Finance is a universal liquid staking platform that empowers its clients to participate in staking without committing substantial amounts of capital and locking up their assets for extended durations. The process is straightforward: deposit your chosen cryptocurrency (ETH, MATIC, or SOL) and let the rewards roll in while Lido’s validators and nodes manage the technical intricacies on your behalf.
One notable advantage of liquid staking through the Lido protocol is that your staked tokens retain their liquidity. When you stake ETH with Lido, you receive stETH in return, which can be further wrapped into wstETH and seamlessly integrated into the DeFi ecosystem. This opens up opportunities for additional rewards on top of the gains from staking itself.
If you decide to venture into Lido Finance, Chainfulness is here to assist you in analyzing your investments and their profitability. We proudly support Lido, and our tools can aid you on your investment journey.
We trust that this article has provided you with valuable insights and information. Please stay connected with us, as we have a wealth of exciting and informative content on the horizon. We wish you success in your investment endeavors.
Invest Wisely!