Lido DAO Review

What is Lido DAO?

Lido DAO is aiming to build liquid staking services for Ethereum, allowing users to earn staking rewards without locking assets. Lido’s customers can deposit their ETH in Lido smart contracts and receive stETH in return. The tokenized version of staked ether allows earning DeFi yield rewards and represents the initial deposit combined with the rewards. 

Once the user’s investment is received by the DAO-controlled smart contract, it gets staked with DAO-picked node operators. Even though the assets are being controlled by the DAO, node operators never have direct access to the customers’ deposited funds.

The difference between staked ether and the stETH token is in the limitations associated with a lack of liquidity and the ability to transfer at any time. Lido is a more flexible solution than self-staking since it avoids the maintenance of a validator node and avoids the risk of freezing assets.

Lido proposes a decentralized approach for liquid staking despite the strict limitations of the beacon chain, its amount of staked ether is fully auditable and doesn’t rely on a single party’s private key management.

How does Lido DAO work?

The Lido DAO members govern Lido, ensuring its efficiency and stability, with a mandate to promote the platform and recruit new users, node operators, and validators with educational content, as well as looking after the technical development.

Lido’s main advantage over similar systems is not requiring node operators to deposit equal collateral of staking positions. Lido DAO-chosen node operators use slashing insurance to supplement having a track record with asset staking, which allows a more capital-efficient approach for the system.

Lido DAO appoints oracles to monitor node operators’ beacon chain accounts and submit data to Lido’s Ethereum 1.0 smart contracts since the beacon chain is a separate network that doesn’t allow direct access for Lido protocols to its data. With every oracle’s update, the system recalculates the stETH token ratio, and when the overall staking rewards are greater than the slashing penalties a profit is registered, in which case the stETH token balance increases and Lido applies a 10% fee. The DAO mints stETH tokens corresponding to its 10% profit and distributes them among the node operators and the DAO’s treasury account.

Since slashing penalties impact the stETH token’s balances negatively part of the Lido fee is transferred to the slashing insurance provider to compensate and protect for reasonably-sized slashing events. In case of massive slashings, the Lido DAO is expected to intervene.

Because withdrawals are not available until transfers are implemented in Ethereum 2.0, rewards restaking is also not possible. Once the update is rolled out the DAO will upgrade Lido to implement the feature.

How to use Lido DAO?

To stake ETH with the Lido DAO app, the user interacts with a smart contract and gets stETH tokens in return which represent a tokenized staking deposit. These tokens can be held, traded, or sold and their balance is based on the amount of staked ETH plus the rewards for staking minus slashing applied to validators.

Before staking, users need to connect a wallet Lido DAO supports, all wallet options are shown after clicking on “Connect Wallet” on the Lido DAO app. Following that, users of the platform need to input the amount of ETH they want to stake and press the “stake” button. The transaction needs to be confirmed through the users’ wallets and the project gives them stETH representing their staked deposit.

Once deposited into the Lido protocol smart contract the funds are locked into an Ethereum proof-of-stake deposit contract. Staked ether is only withdrawable once transfers and smart contracts are implemented on Ethereum 2.0. The deposits are assigned to node operators to validate using them, while never having direct access to the users’ ether.

Lido DAO fees are set at 10% on staking rewards and are split between Lido node operators, the DAO treasury, and an insurance fund. The fees are subject to change through governance voting.

The LDO token

Lido has two tokens LDO used for governance and stETH – the tokenized version of staked ETH. However, since the project also interacts with the Solana ecosystem it also has a token for staked SOL – stSOL. 

stETH allows customers to transfer, trade, or use it in DeFi applications. Once Ethereum‘s 2.0 features allowing transfers and smart contracts are deployed, the token will be updated by the DAO to allow its holders to burn it in exchange for ETH. The stETH balance corresponds 1 to 1 with the amount of ether a user could receive if withdrawals were enabled and instant. 

The market risk that stETH token supply might outweigh the market demand exists, despite the goal of the platform to provide liquidity for ether staked on the beacon chain, since it is precisely this liquidity that makes it possible to sell the token on exchanges, and is the only way to take profit from the token before the aforementioned updates on Ethereum 2.0. 

With the demand for stETH on different DeFi applications growing because of the possibilities of use, it presents such as collateral – the platform hopes the demand for it will also grow, thus raising its price on the market. The possibility to use stETH’s ability as collateral grows the demand for the asset on different dApps, which raises its price on the market.

The stSOL token is used in the same way as stETH – as a representation of staking positions with a diverse set of professional validators on Solana.

The LDO token is a standard governance token allowing its holders voting rights on the platform’s upgrades by participating in the DAO which governs a set of liquid staking protocols, decides the platform's key parameters such as fees and ensures the efficiency and stability of Lido.

The amount of the token being staked in the voting contract by an LDO voter is proportional to the voting weight available. In simple words, the more LDO users lock in their voting contract, the greater the decision-making power they get. The DAO can also upgrade the mechanism of voting just like all other DAO applications. 

Is Lido DAO safe?

To get the project off the ground the first Lido DAO team members contributed $2 million collectively. This DAO included Semantic Ventures, ParaFi Capital, Terra, KR1, P2P Capital, Bitscale Capital, Stakefish, Staking Facilities and Chorus One, Rune Christensen of Maker, Stani Kulechov of Aave, Banteg of Yearn, Will Harborne of Deversifi, Julien Bouteloup of Stake Capital, Jordan Fish, and Kain Warwick of Synthetix. 

In October 2021, the founder of StakeWise - Dmitri Tsumak reported a vulnerability via the Lido DAO bug bounty program on Immunefi. The exploit was found to allow a whitelisted node operator to steal a “small share” of user funds. 

The level of the threat was set at high as at the time it was discovered that all of the undeposited ETH the protocol was in control of was at risk - at the time the sum amounted to around 20k ETH. The short-term action undertaken by the community through governance voting was to temporarily lower staking limits for all node operators to the level of staked keys which effectively prevented any deposits from happening while the team was implementing a further solution to the possible exploit. The full list of proposed solutions to the vulnerability is present on the platform’s forum.

Lido DAO audits can be found in the protocol dashboard on this webpage.

Partners

Lido’s list of partners includes Moonbeam – an Ethereum-compatible smart-contract platform on Polkadot. The Lido DAO has selected MixBytes to drive the collaboration by leading the technical integration for the Polkadot ecosystem. The partnership will provide liquid staking to Moonriver and Moonbean and allow DOT holders the ability to stake their assets while accessing the liquidity of the staked position at the same time.

Earlier in 2021, Lido raised $73 million in fresh funding led by the crypto venture capital firm Paradigm, which bought $51 million worth of LDO tokens from the DAO’s treasury for the amount of 15,120 ETH. The rest of the funding ($22 million) was contributed by a range of investors such as Coinbase Ventures, Three Arrows Capital, Jump Trading, Alameda Research, Digital Currency Group, and others.

Lido’s governance token LDO is represented on exchanges such as SushiSwap, LBank, MEXC Global, Uniswap (v2) BKEX, Gate.io, Digifinex, Hotbit, CoinEx, and Poloniex.

The stETH token is currently being traded on FTX, Hotbit, Gate.io, and Uniswap (v2). 

The stSUN token can only be traded on FTX as of the time of writing.

What's next?

With Ethereum’s transition to proof of stake by launching the Beacon Chain, one of the most anticipated updates has been the availability to unstack assets. Since the update is expected to be live soon, Lido’s main focus right now is developing the implementation of this new feature. 

With the arrival of withdrawals in 2022 Lido finds it very important to adapt the protocol by distributing the miner extractable value between stETH holders, implementing etETH to ETH withdrawal queue, and some other minor protocol changes.

Links

https://research.lido.fi/ 

https://docs.lido.fi/