Before reading the article, sign up for Cryptogram, a free weekly newsletter on Web3 and crypto.
Generally, crypto staking is a process by which investors can earn rewards by delegating their digital assets for a set period of time. Staking helps Proof-of-Stake (PoS) such as Polygon (MATIC) or Ethereum (ETH) network validate transactions in a blockchain and assists with maintaining the security of the relevant networks. However, when someone locks up their funds in a network, this may lead to risks arising from market fluctuations and liquidity troubles.
On the other hand, in terms of liquid staking, the investors do not need to wait and are allowed to pursue other opportunities without jeopardizing the network’s security or liquidity. In liquid staking, when you give your crypto assets to these liquid service providers such as Lido, Rocket pool or Frax, they issue a separate token to you representing the investor’s claims to their staked assets, as well as any rewards that have accrued. This means you can trade or use your tokens as you please while still earning rewards.
Staking in general is a cumbersome process. For instance, staking by yourself is quite hard to comprehend and many blockchains require a minimum stake worth thousands of dollars. Even if you have such liquidity available, you are required to run complicated hardware that needs advanced technical skills. If you try running a validator node and mess something up, this could result in losing part or all of your stake in the blockchain through a process called slashing.
More importantly, once you lock up your funds in the main blockchain, it is not liquid and flexible. This stake needs to be maintained to run the validator nodes. This paved the way for liquid staking derivatives to rise that gives flexibility to trade your tokens whenever you want.
<source: google>
Founded in December 2020, a few weeks after the launch of ETH 2.0, Lido is governed by a DAO. Some key members of Lido DAO are P2P Capital, KR1 and Semantic Ventures. It’s also backed by renowned investors like Kain Warwick, Banteg and Julien Bouteloup. Lido DAO allows ETH locked in the initial phase to be staked into other protocols.
<source: Etherscan>
LIDO currently sits as the uncrowned king of the liquid staking market which is currently huge with numerous protocols fighting for TVL (total value locked). According to DeFillama, there are currently 77 liquid staking providers with billions staked across multiple blockchains. This clearly indicates that there are more users willing to stake their tokens for passive income and this number will continue to grow after Ethereum’s Shanghai upgrade.
<source: DefiLlama>
In order to address the growth potential of the liquid staking market, a protocol needs to have a solid solution and technology. To start with, users are required to send their tokens to Lido’s staking pool smart contract and in return LIDO stakes these tokens and gives us an equal portion of their staked tokens. For instance, by staking 1ETH the user receives 1stETH which can be used across DeFi protocols for yield farming or hold it in your wallet to accumulate ETH staking rewards.
This is done through a process called rebasing, where the user is not required to do anything and the staking rewards get updated once a day and LIDO takes a 10% fee from your staking rewards. In terms of validators, they do not have direct access to the staked tokens and instead are delegated to the validators, which is better in terms of security. For their work to process transactions, store data and add blocks to the blockchain, the validators or node operators are given a 5% reward from LIDO’s staking fees.
<source: Google>
Lido is currently the largest depositor of staked Eth in the beacon chain for Ethereum. Lido also supports other networks apart from ethereum in staking. At present, they support Polygon, Solana, Polkadot and Kusama along with Ethereum and have $11.5 billion staked by 295 thousand staked across these 5 blockchains.
Lido also has partnerships with other lending/borrowing protocols, DAOs such as AAVE, Maker where the stakers can use their stETH to lend/borrow from AAVE or mint DAI in Maker. This has resulted in growth of network effects emerging for stETH. Lido currently has 31% market share in total of ETH deposited in ethereum with 5.6 million Eth deposited according to Dune.
<source: Dune>
LDO, the native token of Lido Finance currently has a circulating supply of 867.37 million, with a current price of $2.48 and market cap of 2.14 billion. The founding members have 64% of the tokens, locked for one year and vested from there. With a total supply of 1 billion tokens, they are allocated to different segments of the Lido DAO community as follows:
DAO Treasury: 36.32%
Initial Lido Developers: 20%
Investors: 22.18%
Founders and Future Employees: 15%
Validators and Signature Holders: 6.5%
Starting from December 2020, LDO tokens were completely locked for one year. From December 2020 to December 2021, they could be used for governance, but not transferred anywhere. They were unlocked and released for movement on a per-block basis from December 2021 onward.
In terms of token distribution, we noticed that they are excessively centralized. According to Etherscan, the top 100 holders collectively own 86.34% with Lido treasury holding 11.4940% currently.
<source: Etherscan>
LDO, the native token of Lido, acts as the governance token. Although there is no value-accrual mechanism that supports the utility of Lido to a greater extent, it’s reasonable to assume that a share of Lido’s 10% commission will benefit token holders into the future along with price appreciation. According to Token Terminal, Lido is generating ~ $1.5-$2.5 million in daily fees.
<source: TokenTerminal>
Overall, we believe that LIDO is currently in a growth phase. Although many experts raised concerns over LDO flooding the market to create a 22.5x increase in circulating supply from December 2021 and throughout 2022, the token has fared well compared to their staking peers. With Rocketpool and Frax giving serious competition, we may see a more mature price growth after the Shanghai upgrade of Ethereum network.
Use promocode TNM51 at www.giottus.com/profile#promo after registration to get Rs.51 worth free Bitcoin.
Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.