Lido DAO
The Lido DAO (LDO) is a Decentralized Autonomous Organization (DAO) that enables users to stake their ETH without locking assets or maintaining infrastructure. It provides liquidity for staked proof-of-stake tokens by issuing 1:1 tokenized versions of staked assets to users. [6]
Lido Staked Ethereum (stETH) is an example of a token that represents staked Ethereum in Lido, combining the value of the initial deposit and staking rewards. [12]
Lido supports Ethereum and other layer-1 proof-of-stake blockchains, such as Solana, Polygon, Polkadot, and Kusama. Its voting power is determined by governance token (LDO), which is used to decide on the key parameters of liquid staking protocols. By participating in other DeFi on-chain activities, users can compound their staking rewards on Lido for additional yields. [1][2][3]
History
Lido launched in December 2020, shortly after the Ethereum 2.0 Beacon Chain[16] went live. Staking on the Ethereum blockchain presented challenges, including only allowing multiples of 32 ETH and requiring technical expertise to stake. Additionally, staked ETH were locked during the initial phase of ETH 2.0, preventing them from being used in other protocols. [5]
Lido offers non-custodial staking services as a potential solution to capital inefficiency issues, allowing users to tokenize their staked ETH as stETH and utilize it across other protocols. [12]
Lido's focus was initially only on Ethereum but it has expanded to other blockchains: Lido on Solana launched in September 2021, on Polygon in November 2021, on Polkadot in May 2022, and on Kusama in February 2022. Stakers of Solana's native SOL asset receive a derivative token; bSOL, Polygon stakers receive stMATIC, Polkadot stakers receive stDOT, and Kusama stakers receive stKSM. [4][5][6]
Lido Technology
Users can deposit ether into the Lido smart contract, running on Ethereum 1.0, to receive stETH in return. stETH tokens can be used to participate in other decentralized protocols, such as lending. stETH tokens are minted upon deposit and burned when withdrawn. When deposited, ether is distributed among node operators chosen by the Lido DAO and is locked into the Ethereum proof-of-stake deposit contract. [16]
Oracles are utilized to facilitate communication between the beacon chain and the Ethereum 1.0 chain. Specifically, the oracles monitor the balances of validators on the beacon chain, transmitting this information to Lido's Ethereum 1.0 smart contract on a daily basis. The balance of validators may fluctuate due to rewards, slashing, and staking penalties. [17]
The oracle updates the stETH token ratio, with staking rewards exceeding slashing penalties resulting in a profit. The stETH balance increases accordingly and a 10% fee is applied to the staking rewards, with half allocated to node operators as per their stake value and the other half sent to the Lido treasury. [18]
Tokenomics
Lido has two tokens: Liquid stETH token; a tokenized version of staked Ethereum and LDO; a token granting governance rights in the Lido DAO.
stETH token
stETH is a token that represents staked ether in Lido, combining the value of initial deposit + staking rewards - penalties. stETH tokens are minted upon deposit and burned when redeemed. stETH token balances are pegged 1:1 to the ETH that is staked using Lido. stETH token balances are updated when the oracle reports changes in total stake every day.
stETH tokens can be used as one would use ETH, allowing users to earn ETH 2.0 staking rewards whilst benefiting from, among other things, yields across decentralized finance products.
The stETH token is a tokenized version of staked ether. When a user sends ether into the Lido liquid staking smart contract, the user receives the corresponding amount of stETH tokens. The stETH token represents Lido users’ deposits and the corresponding staking rewards and slashing penalties. The stETH token is a liquid alternative for the staked ether: it could be transferred, traded, or used in DeFi applications. Lido makes the stETH token balance track a balance of the corresponding balance of beacon chain ether. A user’s balance of stETH tokens corresponds 1 to 1 to the amount of ether a user could receive if withdrawals were enabled and instant.
LDO token
LDO is an Ethereum token granting governance rights in the Lido DAO. The Lido DAO governs a set of liquid staking protocols, decides on key parameters (e.g., fees), and executes protocol upgrades to ensure efficiency and stability. By holding the LDO token, voting right is granted within the Lido DAO. The more LDO locked in a user’s voting contract, the greater the decision-making power the voter gets.
Launch & Initial Token Distribution
1 billion LDO tokens were minted during the LDO launch in December 2020. The token allocation was as follows:
- DAO Treasury: 36.32%
- Investors: 22.18%
- Initial developers: 20%
- Founders and future employees: 15%
- Validators and withdrawal key signers: 6.5%
The tokens have a one-year lock-up which is followed by a one-year vesting period with the exception of the DAO Treasury. [7]
Utility
The LDO token grants voting rights in the Lido DAO, with voting weight proportional to the amount of LDO tokens staked in the voting contract. The Lido DAO is responsible for upgrades, node operators, fee structures, and oracles. [8]
Users receive a tokenized version of their staked assets. When staking on the Ethereum blockchain via Lido, users receive stETH in return (stMATIC for staking on the Polygon blockchain, and stSOL for staking on the Solana blockchain, etc.). These tokenized assets can be used in other decentralized protocols (e.g. lending). [8]
Governance
Proposals are submitted for discussion to the governance platform for the Lido DAO, including Lido Improvement Proposals (LIPs) for core protocol updates[10]. A proposal must meet documentation and format requirements before submission and will be manually reviewed by an editor. The community then has the chance to discuss the LIP on the forum[11]. Once deemed sufficiently mature, the proposal will be added to a governance call where it can be discussed for inclusion in a future platform upgrade. [10]
Lido also uses a Snapshot forum for off-chain voting which is intended as a signaling platform to determine proposal sentiment before launching on-chain votes.[11]
Lido V2
On February 7, 2023, the Lido team released a proposal for an upgrade to the Lido protocol.[22] The two major focal points of the upgrade are:
Staking Router
Lido's Staking Router is a major protocol upgrade that moves the operator registry to a modular and more composable architecture. The Staking Router will act as the nucleus of the Lido vision: a platform where stakers, developers, and node operators can collaborate without friction and drive the future of a decentralized Ethereum together. [18]
Stakers will benefit from a more diverse and secure Node Operator set, as their deposits will be distributed over many independent entities, mitigating network downtime risk and improving Ethereum’s resiliency. [18]
Node Operators benefit through the new modules, additional types of Node Operators such as solo stakers, small groups, DAOs, and professional node operators can increase their avenues of participating in the Lido protocol. [18]
For developers, users can propose and implement modules using different node operator compositions and with various competitive characteristics (such as cover options and fee structures) and apply for inclusion into the Staking Router’s module set. [18]
Withdrawals
Withdrawals enable users to unstake their stETH and, in return, receive ETH at a 1:1 ratio for their staked ETH. [19][18]
The withdrawal mechanism added to Lido’s protocol design includes two modes: Turbo and Bunker mode:
Turbo Mode
This is the default mode used unless a catastrophic event or unforeseen scenario is affecting the Ethereum network. In Turbo Mode, withdrawal requests are fulfilled quickly, using all available ETH from user deposits and rewards. The length of time to exit the network is uncertain; however, in the best case, withdrawal requests can be processed within hours without requiring a validator exit. [19]
Bunker Mode
Bunker Mode is proposed to orderly process withdrawals under catastrophic scenarios. Its purpose is to prevent sophisticated actors from gaining an unfair advantage against other stakers by delaying withdrawals in the whole protocol and socializing the negative impact. [19]
Advanced DeFi Strategies for stETH Launch
In June 2024, Lido announced a partnership with Mellow Finance - one of two inaugural Lido Alliance members alongside Drop - to provide stETH holders with access to a number of advanced DeFi vaults - including restaking - in collaboration with Symbiotic. [22]
The vaults are part of Lido's vision to enter the Ethereum restaking space and to provide Ethereum stakers with access to restaking opportunities. [22]
The advanced DeFi strategies are launched in collaboration with Mellow Finance, a restaking primitive enabling permissionless Liquid Restaking Token (LRT) creation based on individual risk profiles and curation models. [22]
Decentralized Validator Vault
Introduced on August 13, 2024, the Decentralized Validator Vault (the “Vault”) - implemented by Mellow - is designed to boost the number of Distributed Validators active in the Simple DVT Module, advance the decentralization and resilience of the Lido on Ethereum node operator set, improve network security, and allow stakers to potentially benefit from DVT provider incentives. [24][23]
"This vault aims to boost the adoption of Distributed Validators via the Lido Simple DVT Module, enhancing network security and increasing overall validator numbers." - the team tweeted[24]
This Vault will stake ETH through Lido on Ethereum, with 90% of potential Obol and SSV Network incentives directed to vault stakers, with 10% going toward Node Operators. The Vault offers stakers the chance to receive rewards from both stETH rewards, and DVT provider incentives from protocols like SSV, Obol, and Mellow. [24]
