Lido DAO ($ LDO) has become the largest protocol in all of DeFi.
- Lido Takes First Place in DeFi
- Liquid Staking is Having Cake and Eating it Too
- Centralized or Not?
- $ LDO Token
Lido Takes First Place in DeFi
Lido DAO, a liquid staking platform that runs on Ethereum, Solana, Terra, Polygon, and Kusama, has enjoyed a spectacular surge in TVL growth recently. This growth has taken the protocol to the very top of the DeFi charts. Since February first, TVL has more than doubled from 8 billion to 16.5 billion at press time, according to Defi Llama.
– Alex Svanevik (@ASvanevik) March 18, 2022
The amount of ETH deposited on the network has gone parabolic in recent weeks, crossing 2.5m on March 18th. So what’s the big deal, and why isn’t anyone really talking about Lido? What do we make of their own token? We’ll give you the skinny on why Lido is making these silent waves.
Liquid Staking is Having Cake and Eating it Too.
In summary, Lido is a platform for users to stake their crypto, and receive a yield. However, it’s liquid staking, so users are able to continue using their staked assets in DeFi, thus making staking liquid. No lockup period is required. This allows for compounding yield.
For every ETH you stake, you will receive stETH, which is a token that represents your staked ether 1: 1. It is basically a bond. They are minted when you deposit your crypto and burned when you redeem it from Lido. So, for example, you can stake MATIC, earn an 8.7% yield, and then receive your derivative stMATIC tokens, which you could then use on AAVE to lend and earn more yield.
This is supposed to be a solution to current ETH 2.0 staking, where currently you must stake to one validator, and the ETH just sits there locked and illiquid. According to their website, with Lido, you still can not withdraw the ETH you deposit until 2.0 rolls out, but you get the 1: 1 asset you can use across DeFi. When you stake ETH on Lido, you are depositing into the 2.0 beacon chain.
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Lido: Centralized or Not?
Remarkably, Lido’s stETH has a 25% share of all staked ETH and 87% of staking derivatives. It is speculated that Lido is on track to control 50% of all staked ETH. They dominate the ETH staking market, controlling over 80% of the market share. There is currently over $ 10 billion staked on Lido. So, you may be asking, who has the keys to this enormous sum of staked ether?
That’s where it gets messy. First, validators are chosen, and must “apply.” Second, a DAO of 90 voting members controls the keys to the billions of ether, according to Tech Crunch. Lido themselves state plainly in their primer that “if at least (n-m + 1) signatories lose their key shares, get hacked, or go rogue, funds might become locked. If m or more key shares are compromised, funds can be stolen. ”
A big problem with ETH2 is that it does not have a decentralized staking pool, forcing people to give up the keys to their ETH to a centralized service like Lido.
Another problem is that Lido has a monopoly on staking pools and needs competition. It already has too much ETH.
– James Spediacci (@JamesSpediacci) July 3, 2021
$ LDO Token
Lido’s $ LDO token is used for governance. “To have a vote in the Lido DAO, one must hold its governance token, LDO. LDO voting weight is proportional to the amount of LDO a voter stakes in the voting contract. The more LDO locked in a user’s voting contract, the greater the decision-making power the voter gets. ”
Because the token is really used for governance only and does not capture value through anything related to the usage of the protocol, it is not a surprise that Lido is booming, but the $ LDO token is not. Governance tokens are not really smart plays in crypto unless you were airdropped Uniswap back in the day.
The $ LDO token does a measly $ 15 million in daily trading volume and has very low liquidity. There is a reason that Lido is the number one DeFi protocol in the game, but no one cares about the token. However, liquid staking is something every protocol needs, but decentralizing it is critical. Coins can not just be dumped to one entity with 90 voting members.
This is likely why Lido and the team are pleased to have secured a major partnership with a16z, the heavy-hitting VC fund backed by Andreessen Horowitz. a16z will invest in Lido and stake “a portion of their ETH holdings with Lido.” This means a16z will be a part of the DAO, and maybe add more legitimacy and veritas to the project.
We look forward to having a16z participate in Lido as both a staker and a DAO governance participant, and to help us make staking available to everyone.
– Lido (@LidoFinance) March 3, 2022
Derivatives are risky, and this is no different from the derivative bonds that are used in Lido. Nevertheless, crypto is all about building new models and taking risks anyhow. It will be interesting to see just how long Lido keeps the crown.
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