Lido How It Woks | Breakthrough in the Staking Derivatives Market
Analyze the Lido Finance model to understand the highlights in the operation mechanism of each product and the future potential of Lido.
In this article, we will learn in turn:
- Lido lets you use your staked assets to gain yield on top of yield and use your tokens as collateral for yield farming, lending, and more.
- Lido DAO is a known community that builds staking services for Ethereum.
- Lido further allows staking users to earn rewards on as small a deposit as they want without restriction on the number of Ether they deposit.
Introduction
Lido is a staking solution for ETH 2.0 that is backed by several industry-leading staking providers. Users will receive a token when using Lido to stake their ETH on the Ethereum beacon chain. The Lido website is designed to solve problems mainly associated with initial ETH 2.0 staking – inaccessibility, illiquidity, and immovability. It helps make staked ETH liquid and allows participation with any amount of ETH. Users can stake their ETH without even locking their assets while participating in on-chain activities such as lending.
Lido sets out to solve two primary problems for potential ETH 2.0 stakers running a validator:
- The 32 ETH minimum stake requirement
- Funds being locked for a year or more until withdrawals are enabled
How It Works
The Lido DAO governs the five Lido liquid staking protocols. While each of the five supported PoS networks, Ethereum, Solana, Kusama, Polygon and Polkadot, have differences in design, the general mechanics around their liquid staking protocols are similar.
Stakers receive stETH to represent the amount of ETH staked at a 1:1 ratio. The advantage is that you can then use stETH in the same way you would use regular ETH. The staking rewards are received daily and there is no minimum deposit or lock-up periods for staking on Lido.
Staking ETH on Lido allows users to participate in the security of Ethereum without taking on any downside risks.
The APY (Annual Percentage Yield) for the staked ETH depends on the total amount of staked ETH on the network. As the staked ETH increases, the APY decreases. Users of the Lido protocol can always see the current APY in the app, but it is worth mentioning that the APY is subject to frequent change.
Users should also know that Lido will apply a 10% fee for the yield you get, which will be already deducted from your rewards. The protocol is using pooling to transfer the liquidity from L1 to L2 and that will also incur a small gar fee for your part of the share of the transaction.
- 5% account fee of Node Operators.
- 5% fee on Lido Treasury.
Lido DAO
The Lido DAO manages the Lido staking protocol. DAO stands for decentralized autonomous organization, and it represents the community that develops the tools and services necessary to stake Ethereum. The members of the Lido DAO oversee the growth and development of the Lido protocol.
The Lido DAO is responsible for the technical development of the platform. It also promotes Lido and recruits users, validators, and node operators through educational content, protocol promotion, and other activities.
The LDO token is the Lido DAO governance token, and it is responsible for the decentralized ownership of Lido. It also enables holders to vote on the DAO’s governance decisions.
LDO holders can vote on any decision that will affect the future of the platform. The amount of LDO they stake determines their voting power. LDO tokens can also be used to manage fee parameters and add or remove nodes from the network.
Lido Token
The Lido DAO token (LDO) is a native utility token to the Lido staking platform. Created in December 2020 alongside the Lido platform, it has a max supply of 1 billion tokens, of which around 24.5 million (2%) are in circulation.
LDO can be used for the following actions:
- Granting governance rights
- Managing fee parameters and distribution
- Governing the addition and elimination of Lido node operators
It can also be traded on various platforms, including DEXs such as Uniswap (UNI), with both cryptocurrency and stablecoin pairs available.
Lido-staked Assets (stAssets)
In exchange for depositing assets into one of Lido’s liquid staking protocols, users receive a staking derivative (stAsset). This tokenized claim on the stake pool effectively unlocks the liquidity of staked assets while they continue to secure their respective networks and earn rewards. stAssets come in two different forms: rebase and shares.
Rebasing tokens (stETH, stKSM, stDOT, stMATIC, stSOL ) are minted at a 1:1 ratio with the deposit asset. In order to match the underlying stake, the token balance rebases every day to factor in accrued staking rewards. The daily rebase occurs regardless of where the stAsset is acquired; whether it’s directly from Lido, a decentralized exchange (DEX), or another holder.
Value-accruing tokens (stSOL, stMATIC) earn staking rewards through appreciated value, reflected in the stAsset to deposit asset (e.g., stSOL:SOL) exchange rate. Rebase tokens can be converted to value-accruing tokens by being “wrapped.”
As of this writing, stETH accounts for over 98% of the value of stAssets in circulation.The stETH token is currently a purely synthetic, closed-end derivative since it can’t be directly redeemed for its underlying ETH until after The Merge. Instead, holders looking to convert their stETH to ETH rely on exchange (e.g., Curve, Uniswap, and FTX) pricing/liquidity.
Synthetic Tokens Use Cases(stETH)
The ultimate goal of projects like Lido is to unlock liquidity for users while still receiving staking rewards, so the synthetics tokens users receive must be really liquid, then the project successfully create value for users.
Lido has been very interested in this issue since its inception. Lido has solved this problem by collaborating with many famous parties to create more use cases for stETH, stSOL, stKSM, stMATIC, stDOT token.
DEXs
In order to keep stETH liquid, the Lido DAO incentivizes the Curve stETH:ETH pool, currently the deepest AMM pool in DeFi. The Lido DAO token (LDO) and CRV incentives help attract liquidity by bolstering the pool’s APY. This pool, along with others like Uniswap and Balancer, gives stETH holders the ability to exit their staked positions for ETH before the unlock.
The price of 1 stETH should never really go above 1 ETH. This “ceiling” is in place because 1 ETH can always be used to mint 1 stETH through the Lido staking contract. However, the arbitrage mechanics aren’t as clear the other way around.
Since stETH can’t be burned for its underlying ETH on the Lido protocol, the exchange rate currently relies on the market’s price discovery under the ceiling. A number of factors come into play for the current (and historical) discount including the fact that stETH has less liquidity, less utility (e.g., can’t be used to pay gas fees), and more technical (smart contract) risk than ETH. Typically, the mass sell-off of stETH on DEXs by large investment funds such as Alameda Research and 3AC… made the stETH/ETH exchange rate no longer maintain the 1:1 ratio. Read more
Even for other stAssets, DEX liquidity is still useful because it gives holders the option to exit positions instantly, without having to wait through the stake deactivation period.
Lending and Borrowing
While Lido stakers can just hold their tokens or provide low risk (from impermanent loss) liquidity to a DEX, they multiply their opportunities when they start using stAssets as collateral. Some notable lending protocol integrations include Aave and MakerDAO for stETH and Solend for stSOL.
The most popular strategy so far has been recursive borrowing to get further leverage on stAssets. An example is leveraging stETH on Aave, which allows users to borrow up to 70% of collateral value. Repeatedly borrowing ETH and then resupplying stETH under this parameter allows users to triple their staking rewards, albeit with added risk to themselves and stETH.
Analytics
At the time of writing, Lido’s Total Value Locked at the moment is $4.64B. After Terra’s crash and Alameda Research’s stETH sell-off, 3AC. Lido’s TVL has been reduced by 45% since May.
Monitor the liquidity pool ratio of the stETH/ETH trading pair in Curve. On June 21, 2022 the share of stETH in the pool was 80.2%. This shows that most people are scared and sell-off to ETH recently, leading to stETH losing its peg ratio. To get stETH/ETH back to 1:1, balancing the ratio in the liquidity curve pool is one of the things that is needed right now.
Verdict
Lido has just begun its journey and is paired with sectors that will guarantee its growth. DeFi is a booming business and Ethereum’s upgrade is attracting many more people to the market.
With increasing opportunities and better scalability and speed, many more users will undoubtedly join Ethereum, meaning ever-increasing DApps and investors. As users become more accustomed to the technology, they will want to take advantage of the many ways to make money — the easiest of which is staking.
Find more information about: Lido Finance
Website: https://lido.fi/
Twitter: https://twitter.com/lidofinance
Telegram: https://t.me/lidofinance
If you have any questions, comments, suggestions, or ideas about the project, please email ventures@coincu.com.
DISCLAIMER: The Information on this website is provided as general market commentary, and does not constitute investment advice. We encourage you to do your own research before investing.
Issac
Coincu Ventures
Author
DeFi
Lido How It Woks | Breakthrough in the Staking Derivatives Market
Analyze the Lido Finance model to understand the highlights in the operation mechanism of each product and the future potential of Lido.
In this article, we will learn in turn:
- Lido lets you use your staked assets to gain yield on top of yield and use your tokens as collateral for yield farming, lending, and more.
- Lido DAO is a known community that builds staking services for Ethereum.
- Lido further allows staking users to earn rewards on as small a deposit as they want without restriction on the number of Ether they deposit.
Introduction
Lido is a staking solution for ETH 2.0 that is backed by several industry-leading staking providers. Users will receive a token when using Lido to stake their ETH on the Ethereum beacon chain. The Lido website is designed to solve problems mainly associated with initial ETH 2.0 staking – inaccessibility, illiquidity, and immovability. It helps make staked ETH liquid and allows participation with any amount of ETH. Users can stake their ETH without even locking their assets while participating in on-chain activities such as lending.
Lido sets out to solve two primary problems for potential ETH 2.0 stakers running a validator:
- The 32 ETH minimum stake requirement
- Funds being locked for a year or more until withdrawals are enabled
How It Works
The Lido DAO governs the five Lido liquid staking protocols. While each of the five supported PoS networks, Ethereum, Solana, Kusama, Polygon and Polkadot, have differences in design, the general mechanics around their liquid staking protocols are similar.
Stakers receive stETH to represent the amount of ETH staked at a 1:1 ratio. The advantage is that you can then use stETH in the same way you would use regular ETH. The staking rewards are received daily and there is no minimum deposit or lock-up periods for staking on Lido.
Staking ETH on Lido allows users to participate in the security of Ethereum without taking on any downside risks.
The APY (Annual Percentage Yield) for the staked ETH depends on the total amount of staked ETH on the network. As the staked ETH increases, the APY decreases. Users of the Lido protocol can always see the current APY in the app, but it is worth mentioning that the APY is subject to frequent change.
Users should also know that Lido will apply a 10% fee for the yield you get, which will be already deducted from your rewards. The protocol is using pooling to transfer the liquidity from L1 to L2 and that will also incur a small gar fee for your part of the share of the transaction.
- 5% account fee of Node Operators.
- 5% fee on Lido Treasury.
Lido DAO
The Lido DAO manages the Lido staking protocol. DAO stands for decentralized autonomous organization, and it represents the community that develops the tools and services necessary to stake Ethereum. The members of the Lido DAO oversee the growth and development of the Lido protocol.
The Lido DAO is responsible for the technical development of the platform. It also promotes Lido and recruits users, validators, and node operators through educational content, protocol promotion, and other activities.
The LDO token is the Lido DAO governance token, and it is responsible for the decentralized ownership of Lido. It also enables holders to vote on the DAO’s governance decisions.
LDO holders can vote on any decision that will affect the future of the platform. The amount of LDO they stake determines their voting power. LDO tokens can also be used to manage fee parameters and add or remove nodes from the network.
Lido Token
The Lido DAO token (LDO) is a native utility token to the Lido staking platform. Created in December 2020 alongside the Lido platform, it has a max supply of 1 billion tokens, of which around 24.5 million (2%) are in circulation.
LDO can be used for the following actions:
- Granting governance rights
- Managing fee parameters and distribution
- Governing the addition and elimination of Lido node operators
It can also be traded on various platforms, including DEXs such as Uniswap (UNI), with both cryptocurrency and stablecoin pairs available.
Lido-staked Assets (stAssets)
In exchange for depositing assets into one of Lido’s liquid staking protocols, users receive a staking derivative (stAsset). This tokenized claim on the stake pool effectively unlocks the liquidity of staked assets while they continue to secure their respective networks and earn rewards. stAssets come in two different forms: rebase and shares.
Rebasing tokens (stETH, stKSM, stDOT, stMATIC, stSOL ) are minted at a 1:1 ratio with the deposit asset. In order to match the underlying stake, the token balance rebases every day to factor in accrued staking rewards. The daily rebase occurs regardless of where the stAsset is acquired; whether it’s directly from Lido, a decentralized exchange (DEX), or another holder.
Value-accruing tokens (stSOL, stMATIC) earn staking rewards through appreciated value, reflected in the stAsset to deposit asset (e.g., stSOL:SOL) exchange rate. Rebase tokens can be converted to value-accruing tokens by being “wrapped.”
As of this writing, stETH accounts for over 98% of the value of stAssets in circulation.The stETH token is currently a purely synthetic, closed-end derivative since it can’t be directly redeemed for its underlying ETH until after The Merge. Instead, holders looking to convert their stETH to ETH rely on exchange (e.g., Curve, Uniswap, and FTX) pricing/liquidity.
Synthetic Tokens Use Cases(stETH)
The ultimate goal of projects like Lido is to unlock liquidity for users while still receiving staking rewards, so the synthetics tokens users receive must be really liquid, then the project successfully create value for users.
Lido has been very interested in this issue since its inception. Lido has solved this problem by collaborating with many famous parties to create more use cases for stETH, stSOL, stKSM, stMATIC, stDOT token.
DEXs
In order to keep stETH liquid, the Lido DAO incentivizes the Curve stETH:ETH pool, currently the deepest AMM pool in DeFi. The Lido DAO token (LDO) and CRV incentives help attract liquidity by bolstering the pool’s APY. This pool, along with others like Uniswap and Balancer, gives stETH holders the ability to exit their staked positions for ETH before the unlock.
The price of 1 stETH should never really go above 1 ETH. This “ceiling” is in place because 1 ETH can always be used to mint 1 stETH through the Lido staking contract. However, the arbitrage mechanics aren’t as clear the other way around.
Since stETH can’t be burned for its underlying ETH on the Lido protocol, the exchange rate currently relies on the market’s price discovery under the ceiling. A number of factors come into play for the current (and historical) discount including the fact that stETH has less liquidity, less utility (e.g., can’t be used to pay gas fees), and more technical (smart contract) risk than ETH. Typically, the mass sell-off of stETH on DEXs by large investment funds such as Alameda Research and 3AC… made the stETH/ETH exchange rate no longer maintain the 1:1 ratio. Read more
Even for other stAssets, DEX liquidity is still useful because it gives holders the option to exit positions instantly, without having to wait through the stake deactivation period.
Lending and Borrowing
While Lido stakers can just hold their tokens or provide low risk (from impermanent loss) liquidity to a DEX, they multiply their opportunities when they start using stAssets as collateral. Some notable lending protocol integrations include Aave and MakerDAO for stETH and Solend for stSOL.
The most popular strategy so far has been recursive borrowing to get further leverage on stAssets. An example is leveraging stETH on Aave, which allows users to borrow up to 70% of collateral value. Repeatedly borrowing ETH and then resupplying stETH under this parameter allows users to triple their staking rewards, albeit with added risk to themselves and stETH.
Analytics
At the time of writing, Lido’s Total Value Locked at the moment is $4.64B. After Terra’s crash and Alameda Research’s stETH sell-off, 3AC. Lido’s TVL has been reduced by 45% since May.
Monitor the liquidity pool ratio of the stETH/ETH trading pair in Curve. On June 21, 2022 the share of stETH in the pool was 80.2%. This shows that most people are scared and sell-off to ETH recently, leading to stETH losing its peg ratio. To get stETH/ETH back to 1:1, balancing the ratio in the liquidity curve pool is one of the things that is needed right now.
Verdict
Lido has just begun its journey and is paired with sectors that will guarantee its growth. DeFi is a booming business and Ethereum’s upgrade is attracting many more people to the market.
With increasing opportunities and better scalability and speed, many more users will undoubtedly join Ethereum, meaning ever-increasing DApps and investors. As users become more accustomed to the technology, they will want to take advantage of the many ways to make money — the easiest of which is staking.
Find more information about: Lido Finance
Website: https://lido.fi/
Twitter: https://twitter.com/lidofinance
Telegram: https://t.me/lidofinance
If you have any questions, comments, suggestions, or ideas about the project, please email ventures@coincu.com.
DISCLAIMER: The Information on this website is provided as general market commentary, and does not constitute investment advice. We encourage you to do your own research before investing.
Issac
Coincu Ventures
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