Introduction

Lido DAO is a community that builds liquid staking service for Ethereum. Lido allows users to earn staking rewards without locking assets or maintaining staking infrastructure. Staking with Lido is primed to start along with Phase 0 of Ethereum 2.0.

Ethereum is soon to be the biggest staking economy in the space. However, staking on the first stages of Ethereum 2.0 comes with a high market risk related to frozen staked assets until transfers will be available in Ethereum 2.0 (Phase 1.5 or Phase 2), which is expected to happen next year at the earliest. Until that time, no one will be able to withdraw staked ether, and, for example, sell them on an exchange.

Lido liquid staking protocol is an Ethereum 2.0 liquid staking protocol solving these drawbacks. Users can deposit their ether in Lido smart contracts and receive stETH -- a tokenized version of staked ether -- in return. The DAO-controlled smart contracts then stake tokens with DAO-picked node operators. Users' deposited funds are controlled by the DAO, node operators never have direct access to the users' assets.

Unlike staked ether, the stETH token is free from the limitations associated with a lack of liquidity and can be transferred at any time. The stETH token balance will be calculated based on the total amount of staked ether, plus rewards and minus any slashing penalties. Lido is a much more flexible solution than self-staking since it avoids freezing assets and maintaining a validator node. In addition, it allows staking users to earn rewards on as small a deposit as they want without restriction on the number of ether deposited.

At the start, the system applies a 10% fee (this can be changed by the DAO) on staking rewards that are split between node operators, the DAO, and a slashing insurance fund. This fee level should make Lido staking more profitable than what is offered with most available exchange staking, but, unlike them, Lido’s amount of staked ether is fully auditable and does not rely on a single party’s private key management. Despite the strict limitations of the beacon chain, the first stage of Ethereum 2.0, we propose a decentralized approach for liquid staking.

Goals

Lido aims to allow users to stake ether without losing the ability to trade or otherwise use their tokens. Lido will be a decentralized infrastructure for issuing a liquid token that is safer than exchange staking and has incredible flexibility compared to self-staking.

The primary goals of Lido are:

• To allow users to earn staking rewards without fully locking their ether;

• To make it possible to earn rewards on as small a deposit as users want without restriction on deposits different than 32 ether;

• To reduce the risks of losing a staked deposit due to software failures or malicious third-parties;

• To provide the stETH token as a building block for other applications and protocols (e.g., as collateral in lending or other trading DeFi solutions);

• To provide an alternative to exchange staking, self-staking, and other semi-custodial and decentralized protocols.

Why DAO

The Lido DAO is a Decentralized Autonomous Organization, which builds liquid staking protocol for Ethereum.

In the case of liquid staking, the competitors are well-known providers like centralized exchanges and other decentralized protocols like RocketPool. The DAO is the logical compromise between full centralization and decentralization, which allows the deployment of competitive products without full centralization and custody on the exchanges.

Lido does not believe that it is possible to make a liquid staking protocol that is completely trustless. For the first phases of Ethereum 2.0, it is not possible at all.

A DAO is an optimal structure for launching Lido because:

• Lido is highly dependent on the design and restrictions of the beacon chain;

• Ethereum 2.0 staking protocol may change and therefore Lido should be upgradable;

• An insurance provider must be selected and terms for slashing insurance must be negotiated;

• DAO governance is better than one person or a developer's team for making decisions about changes in Lido;

• a DAO will be able to cover the costs of developing and upgrading the protocol from the DAO token treasury. The DAO will accumulate service fees from Lido, which can be funneled into the insurance and development funds, distributed by the DAO

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

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 user’s 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 corresponding balance of beacon chain ether. A user’s balance of stETH tokens corresponds 1 to 1 to an amount of ether a user could receive if withdrawals were enabled and instant.

Ethereum 2.0 transfers and smart contracts are scheduled at Phase 2. Once these features are deployed, the Lido DAO will upgrade Lido to allow the users to burn stETH tokens in exchange for ether.

While the fact that a stETH balance tracks the corresponding amount of beacon chain such that ether should be the main driver of the stETH/ETH exchange rate, several other factors are affecting the market prices.

There is a market risk that the stETH token supply will outweigh the market demand. While the goal of the Lido is to provide liquidity for ether staked on the beacon chain, the same liquidity makes it possible to sell the token on exchanges. Before Phase 2 deployment, it is the only way to take profit from the stETH token.

However, stETH tokens also can be used in various decentralized financial products. For instance, stETH could be used as collateral. The higher the rate of stETH adoption in different DeFi applications, the more demand for it there would be.

LDO Token

Lido DAO governs a set of liquid staking protocols with Lido on Ethereum among them. The Lido DAO decides on Lido’s key parameters (e.g., fees) and executes Lido upgrades. The Lido DAO members govern Lido to ensure its efficiency and stability.

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. The exact mechanism of LDO voting can be upgraded just like the other DAO applications.

Conclusion

We are in the middle of a big Ethereum transition from the proof of work to the proof of stake consensus model. Security of the network depends on the amount of the total staked ether and the level of validators' decentralization — how many the network would have and how big they would be.

As withdrawals are not available on the beacon chain, there is a risk that some users would not be able to afford self-staking. Because of that, users would either use some sort of exchange staking or pass on the staking altogether.

Limitations of the beacon chain affect the liquidity of staked capital for exchanges. We expect that most exchanges would not be able to offer rewards comparable to self-staking. The other thing to look out for is the high risk of network centralization. Exchanges are historically among the biggest ether holders, and they could become even bigger due to exchange staking.

Liquid staking provides a viable alternative to both self and exchange staking. Lido provides a balance of risk, reward, and сonvenience. It allows users to trade staked ether without a negative impact on the Ethereum network's decentralized nature.

Lido is useful for both small and large ether holders. Small wallets could use staking without having to stake big chunks of their funds. Larger entities would be able to hedge their funds against ether volatility and use staking without having to maintain staking infrastructure.

Tracking Lido