Established in 2020, Lido offers a liquid staking service for Ethereum (ETH) and various PoS blockchains like Solana (SOL), Polygon (MATIC), Polkadot (DOT), and Kusama (KSM).
Lido provides users with 1:1 tokenized versions of staked assets, allowing them to have liquidity for their staked PoS tokens. This enables them to earn staking rewards on Lido and engage in other DeFi activities on-chain for extra yields.
How It Works?
Liquid staking services such as Lido make it easier for users to join in securing PoS networks by allowing them to stake any amount of PoS assets and earn block rewards without locking up their tokens. This innovative approach tackles the issues of illiquidity, complexity, and centralization in PoS staking, while also reducing barriers to entry and opportunity costs.
When users deposit their PoS assets to Lido, the Lido protocol stakes their tokens on the PoS blockchain. The Lido protocol is a smart contract that handles users’ deposits and withdrawals, delegates funds to node operators, sets the fees for staking rewards, and manages the creation and removal of tokens. Additionally, the smart contract includes a comprehensive list of node operators, their validation keys, and records of reward distribution.
Users will be given stAsset tokens for their deposited funds, allowing them to earn rewards in multiple DeFi protocols and dApps, like using them for lending and yield farming to increase rewards.
For instance, let’s consider staking ETH. With Ethereum moving to PoS through The Merge upgrade, users can stake a minimum of 32 ETH to be a validator and earn rewards for validating transactions. But the minimum staking amount may be too high for most users.
Users can stake a small amount of 1 ETH or less on Lido to earn block rewards. Once they stake their ETH, they will get stETH, an ERC-20 token that mirrors their deposited ETH at a 1:1 ratio. stETH tokens are created when funds are deposited into the Lido staking pool smart contract, and will be destroyed when users withdraw their ETH tokens.
The staked ETH from users will be divided among the node operators (validators) on the Lido network and placed in the Ethereum Beacon Chain for validation. The funds are kept safe in a smart contract and validators cannot touch them. Then, the Lido DAO will choose, bring on board, assist, and include the validators’ addresses in the registry smart contract. Once selected, the validators will receive a set of keys for validation.
The deposited ETH from ETH users will be divided into groups of 32 ETH and distributed among active Lido node operators. These operators will use a public validation key to validate transactions related to users’ staked assets. By distributing users’ stakes to multiple validators, the risks of single-point-of-failure in single-validator staking can be eliminated. Furthermore, the node operators will create an address for users to withdraw their staked ETH once The Merge is completed.
What is LDO?
LDO is the utility and governance token of Lido. It is an ERC-20 token with a total supply of 1 billion. LDO rewards users and gives them governance rights in Lido DAO. Holding more LDO tokens means having a stronger voting power.
Conclusion
Lido’s liquid staking service allows users to stake their tokens without losing liquidity. It is suitable for both small and large PoS token holders, giving them the freedom to stake and unstake whenever they want. Liquid staking on platforms like Lido could help DeFi grow by simplifying the staking process and making it more accessible.