Understanding Liquid Staking with Lido (LDO): A Liquidity Solution for Proof-of-Stake Staking

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Bittime - Ethereum is one of the largest and most popular blockchain platforms in the world, allowing the development and launch of decentralized applications (dApps) and smart contracts (smart contracts). Ethereum is also home to many decentralized finance (DeFi) projects and protocols, which offer a wide range of financial services and products without intermediaries.

To maintain network security and consensus, Ethereum uses a mechanism called Proof of Stake (PoS). PoS is an alternative way to Proof of Work (PoW), which is used by Bitcoin and other blockchain networks. PoW requires participants, called miners, to use large amounts of computing power to solve complex mathematical puzzles and validate transactions. This process requires a lot of energy and resources, which makes it inefficient and environmentally unfriendly.

PoS, on the other hand, requires participants, called validators, to lock a certain amount of their tokens, called stake, to support the network. Validators who have larger stakes have a greater chance of being selected to create new blocks and receive rewards. This process is more energy and resource efficient, which makes it more efficient and environmentally friendly.

Key Challenges of Proof-of-Stake (PoS) Staking

Staking on proof-of-stake (PoS) blockchains is often faced with a major problem: limited liquidity. Users cannot withdraw funds or access locked tokens, thus preventing them from earning additional results from other decentralized finance (DeFi) protocols until the lock-up period ends.

On the other hand, large barriers to entry, such as the high cost of running nodes and the overall complex validator setup, discourage many general retail users from participating in PoS staking. Lido provides an alternative to traditional PoS staking through liquid staking solutions, effectively increasing the liquidity of staked tokens and making staking more accessible for users.

What is Liquid Staking?

Liquid staking is a staking method that allows users to earn rewards from securing the blockchain while using the same funds across DeFi protocols and other blockchain applications. With liquid staking, users do not need to lock their tokens in a specific protocol, but can exchange them for tradable derivative tokens. Liquid staking offers flexibility, liquidity, and capital efficiency for users, while increasing network security and participation for blockchains. Liquid staking has experienced rapid growth along with the development of the DeFi industry and Ethereum's transition to a Proof of Stake consensus mechanism.

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What is Lido (LDO)?

Launched in 2020, Lido (LDO) is a liquid staking solution for proof-of-stake-based cryptocurrencies. It supports post-Ethereum Merge (formerly Ethereum 2.0) layer consensus staking, as well as other layer-1 PoS blockchains such as Polygon, Kusama, Solana, and Polkadot.

Lido has a native token called LDO, which is used for governance and incentive purposes. The LDO token has a total supply of 1 billion, with 890.9 million tokens currently in circulation. According to data from CoinMarketCap, the price of the LDO token on February 15, 2024 is $2.97, with a market cap of $2.64 billion and a daily trading volume of $57.7 million. According to data from CoinGecko, the LDO token reached an all-time high of $11 on November 16, 2023, and an all-time low of $0.406 on June 18, 2022.

How Does Lido (LDO) Work?

Liquid staking services like Lido invite new users to participate in securing PoS networks like theirs by allowing users to stake a certain amount of PoS assets in exchange for block rewards. Lido provides an innovative solution to the barriers posed by traditional PoS staking by effectively lowering the entry barriers and costs associated with locking one's assets in a single protocol.

Lido works in the following way:

• Users deposit their PoS tokens, such as ETH, MATIC, SOL, or DOT, into Lido smart contracts, which act as staking service providers.
• Lido smart contracts allocate PoS tokens deposited to several professional validators, selected by the Lido community through a governance process. These validators are responsible for running nodes and creating new blocks in the corresponding PoS network.
• Users receive stAsset tokens equivalent to deposited PoS tokens, such as stETH, stMATIC, stSOL, or stDOT, in a 1:1 ratio. These stAsset tokens represent the user's share of the Lido staking pool and their right to receive staking rewards.
• Users can use their stAsset tokens for various other DeFi activities, such as lending, exchanges, or yield farming, without losing their right to receive staking rewards. stAsset tokens can also be traded on crypto exchanges or exchanged back to native PoS tokens at any time.

Does Lido Work on Other Blockchains?

Yes, Lido supports staking on various PoS blockchains, such as:

Ethereum 

Lido combines ETH from many Lido users to qualify for Ethereum staking. Lido does not require guarantees from nodes to become validators, unlike other platforms.

Solana 

Solana staking provides the same benefits as Ethereum staking. Solana tokens can be exchanged for stSOL, which can be used as collateral in other DeFi protocols.

Polygon 

Lido for Polygon allows users to stake MATIC tokens on Ethereum and earn stMATIC as proof of ownership. stMATIC can provide staking rewards and be used on other DeFi protocols.

Polka dots 

Lido for Polkadot, or "Lido DOT," allows users to earn rewards and use stDOT tokens when their Polkadot tokens are locked in the protocol.

Kusama 

Kusama Staking on Lido provides users with stKSM, which provides daily staking rewards and can be used in the Kusama and Moonriver ecosystems.

What Risks Might Occur When Staking on Lido?

Although Lido is a popular liquid staking protocol, there are some risks to be aware of. Some of the biggest risks Lido users face are:

Technical risks associated with Beacon Chain 

Ethereum's PoS layer is new and unstable, so it may experience technical issues affecting staking.

Smart contract bug 

All code-based platforms are vulnerable to bugs that can disrupt network functionality. Lido is open and audited periodically, but still has a bounty program to prevent bugs.

Risks associated with DAOs 

Lido initially had 600,000 ETH from several accounts controlled by multisignatures. This reduces the risk of custody, but there is still a chance that signers will be hacked or lose their keys, which could lead to Lido's funds being locked up.

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Also Read:

What is Staking?

What is Liquid Proof of Stake (LPoS)?

What is Lido DAO (LDO)? Liquid Staking Solutions

DISCLAIMER: This article is informational in nature and does not constitute an offer or solicitation to sell and buy any crypto asset. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices may change significantly from time to time and Bittime is not responsible for fluctuations in crypto asset exchange rates.