Lido: Crypto Staking Rewards via LDO Token | Gemini (2024)

What Is Lido?

Lido DAO is a non-custodial staking solution for the Ethereum, Terra, and Solana blockchains. More specifically, Lido provides a platform for individuals and businesses to pool token assets to be staked on Proof-of-Stake (PoS) based blockchain networks in exchange for various reward incentives. The Lido decentralized autonomous organization (DAO) allows users to stake tokens without locking assets, surpassing a minimum threshold, or maintaining staking infrastructure themselves, all of which can be inhibitive to participating in staking. On the Lido crypto platform, the incentives are twofold. Along with the rewards accrued from the tokens staked on the Layer-1 network, Lido DAO users receive rewards via a staked reward token that’s pegged 1:1 to the underlying staked assets. Lido calls its unique methodology “liquid staking.”

Before we explore how Lido’s unique staking methodology works, it's worth emphasizing each component of the Lido ecosystem. Lido staking apps, the Lido DAO, and the native Lido DAO token (LDO) make up the core structure of the Lido offering. Because Lido is a decentralized staking protocol, the Lido DAO is responsible for platform governance and upkeep. The Lido DAO is also responsible for distributing funds from the Lido Treasury and covering expenses like development updates and community initiatives. In keeping with its DAO architecture, all decisions, proposals, and updates are meant to be completely transparent.

In summary, the Lido DAO is responsible for the management and smooth operation of the Lido staking apps. The native LDO crypto asset provides governance rights to Lido's community members. This article will explore each of these components in more detail by breaking down the benefits Lido can introduce to different blockchain ecosystems.

How Does the Lido DAO Work?

Since launching in December 2020, the primary focus of Lido has been Ethereum staking services. However, the platform now supports staking protocols on other blockchains. Specifically, Lido DAO introduced staking on Terra in March 2021 — and Solana staking in September 2021.

Unlike other staking providers, Lido DAO’s staking rewards are designed to maintain asset liquidity. For example, when users stake ether (ETH), they receive staked ETH (stETH) tokens. Similarly, those who stake native LUNA tokens on Terra receive bLUNA and those who stake SOL on Solana receive stSOL. Stakeholders can use these derivative tokens within the Lido crypto ecosystem, including various popular decentralized finance (DeFi) platforms like Yearn, Curve, and Maker. For example, stETH holders can deposit their tokens to Curve's stETH-ETH liquidity pool, allowing them to simultaneously accrue trading fees, liquidity mining rewards, and Lido's Ethereum 2.0 rewards.

How the Lido Crypto Protocol Benefits Ethereum

Although the potential liquidity benefits of using Lido DAO are clear, the specific hurdles the platform is designed to overcome are worth noting. These challenges are most apparent on the Ethereum blockchain as the network moves to PoS and sharding to improve scalability. Although each Ethereum 2.0 element is developing in parallel, dependencies across the three elements will determine the final release date.

• Beacon Chain (Phase 0): This chain went live on December 1, 2021, introducing PoS to Ethereum. However, as of January 2022, the Beacon chain has not been integrated into the Ethereum mainnet, meaning Ethereum will continue to use Proof of Work (PoW) until the Merge.

• The Merge (Phase 1): This component of the Ethereum transition will occur when the Beacon Chain is integrated into the Ethereum mainnet. Once the Merge occurs, users will need to stake ETH to activate validator nodes, which are responsible for creating new blocks. This phase is scheduled to take place in 2022.

• Shard Chains (Phase 2): After the Merge, shard chains will expand Ethereum's capacity to process transactions and store data by moving transactions off the mainchain. In other words, shard chains enable Layer-2 solutions that lower transaction fees while leveraging the heightened security of the mainchain. This phase is scheduled to occur sometime in 2023.

Ethereum Staking Rewards

Although this transition may seem straightforward, the challenges associated with direct Ethereum staking during this time of transition may discourage participation. For example, users can only stake multiples of 32 ETH, significantly limiting the number of potential stakers. Lido solves this problem by allowing traders to earn rewards on smaller ETH stake deposits; there are no minimum staking requirements.

Technical expertise is also necessary to stake on Ethereum. The Lido crypto protocol can help overcome this hurdle by allowing users to stake without setting up a validator node. In addition, users who stake ETH in the initial phase of Ethereum 2.0 can't unlock their tokens until smart contracts and transfers are implemented in Phase 2. Lido bypasses this requirement by issuing derivative tokens that solve the capital inefficiency problem.

It's important to note that Lido must still adhere to Ethereum staking requirements. The platform achieves this compliance by pooling ETH stakes from multiple users and allocating it to validator nodes in multiples of 32 ETH. However, unlike other staking platforms, Lido does not require that nodes deposit collateral equal to the staking position to become a validator. Instead, the Lido DAO selects nodes with a proven track record of staking assets, requiring only one asset deposit in the protocol contract. Notably, chosen node operators never have access to user funds; only the DAO does. Using this model, the Lido DAO aims to make the platform more "capital efficient."

Lido and the Solana Blockchain

In general, Lido for Solana offers the same potential benefits as the Ethereum staking service: liquid staking, a simplified user experience, instant liquidity, and DeFi integrations that can amplify yields. Lido for Solana is a liquid staking protocol governed by the Lido DAO. Lido users can use this service to stake SOL tokens in exchange for staked SOL (stSOL). These tokens benefit users because they can be traded or utilized as collateral across other DeFi protocols, much like stETH. The Lido crypto team continues to add integrations with projects operating in the emerging Solana DeFi space to broaden the utility of stSOL tokens.

Lido and the Terra Blockchain

Like Ethereum and Solana, the staking platform for Terra allows users to earn rewards without locking in LUNA tokens or setting up staking infrastructure. However, unlike the Ethereum and Solana staking apps, Lido generates two derivative tokens on the Terra staking service. The main difference between these two tokens is how they distribute staking rewards:

• Staked LUNA (stLUNA): Staking rewards compound, meaning they're sold for more LUNA and immediately restaked. This process increases the total staked LUNA, growing a stLUNA holder's exposure to the LUNA token.

• Bonded LUNA (bLUNA): Staking rewards are sold for the TerraUSD stablecoin and sent to a separate bLUNA rewards contract from which users can collect their rewards. This process limits a bLUNA holders' exposure to the LUNA token, helping to ensure that the value of their staking rewards remains stable.

LDO Crypto Governance

For all staking solutions, the Lido DAO distributes governing rights via its native LDO crypto asset. In this case, each LDO token holds the weight of one vote, meaning that voting power and influence over decisions are proportionate to a user's stake in the network. However, Lido is different from many other DAOs because the LDO voting mechanism is adjustable and upgradable without impacting other adaptable protocols on the Lido blockchain. In other words, the Lido DAO can make changes to the governance structure without affecting other functions on the platform.