Today we are going to talk about one of the most interesting projects in the Blockchain environment. This is Lido Dao (LDO), a platform that plays a crucial role in the decentralized finance (DeFi) ecosystem. In this article, we'll explore in detail what Lido Dao is and how it works.
What is Lido Dao?
Lido Dao is a platform that offers a liquid staking solution for Proof of Stake cryptocurrencies such as Ethereum, Solana and Polygon.
Cryptocurrency staking is a process in which a holder of a cryptocurrency actively participates in the network of a blockchain by maintaining and securing the network by holding and locking a certain amount of coins of that cryptocurrency in a specific wallet. This process contributes to the maintenance and security of the network, and in return, the participant receives rewards in the form of more cryptocurrencies or tokens.
Lido Dao provides a solution for transforming staked assets into liquid assets that can be used for market operations and participate in other DeFi activities without the need to disassociate yourself from the staking process.
Staking on Lido grants users stakeholders tokens, a freely transferable token that represents their deposit and the rewards earned over time. This means that the staked assets can still be used in other DeFi applications for additional returns.
The return that users get when participating in staking through Lido Finance varies. This is because it is determined by several factors, including the performance of the validators, the total participation in the protocol, and market conditions.
History and Founders
Lido was co-founded in 2020 by Konstantin Lomashuk, Vasily Shapovalov And Jordan Fish. Behind Lido DAO is a group of highly respected individuals and organizations in the DeFi space.
Jordan Fish, co-founder of Lido Dao.
Lido was launched in Ethereum With the mission of keeping the decentralized Beacon Chain and democratize access for those with less than 32 ETH. Since then, it has been released on several other Proof of Stake blockchains, including Solana, Polkadot, Kusama And Polygon, with others in development.
There are four essential components of Lido's infrastructure, including the participation group, node operators, st [token] and the DAO.
The Participation Group is a protocol that manages deposits, participation rewards and withdrawals, with a separate one for each compatible network. Los Node operators are professional participation providers that ensure the safety of funds and the operations of validators.
St [token]
The St [token] is a token that represents the assets staked on Lido, combining the value of the initial deposit +participation rewards - penalties. For example, in the case of ETH, the token will be stETH, which represents the ETH staked on Lido. stETH tokens are issued upon deposit and burned upon redemption. Their balances are issued in a 1:1 ratio with the ETH that you bet with Lido.
Token balances are updated when the oracle reports changes in total participation each day. To maintain price parity for stETH, Lido uses three price stabilization mechanisms.
First, users buy StETH when it falls below its price parity, then sell it for ETH, creating an organic financial incentive. Second, liquidity mining is used to encourage investors to deposit both assets in the liquidity pool. Finally, the attractive features of StETH, such as its ability to be freely traded while earning participation rewards, make it suitable for lending protocols such as Aave, creating organic demand and helping to maintain its price parity.
The stETH token can be used as you would use ETH, allowing you to earn rewards for participating in ETH while benefiting, among other things, from rewards in decentralized finance products.
DAO
The DAO is responsible for managing the Lido liquid protocol, including selecting node operators and configuring protocol parameters.
The Lido DAO is a protocol designed to simplify participation services for PoS networks. It allows users to delegate their digital assets to a trusted and preferred validator, allowing them to obtain returns. Lido uses smart contract algorithms to distribute tokens among 29 validators, all of them pre-approved by Lido's DAO, and in exchange for sharing their node capacity, they receive 5% of the participation reward of all the ETH delegated to them by Lido.
5% of the participation rewards go to the Lido DAO treasury, while the remaining 90% goes to stETH holders who have staked their tokens using the Lido protocol. The stETH token is freely negotiable and is tied to the price of ETH. For example, if a user bets 1 ETH with Lido, they will receive 1 stETH in return.
What is Lido V2?
In 2023, Lido V2 came out, as the most important update to the Lido protocol to date, Lido V2 significantly improves the Ethereum participation experience while pushing the Lido protocol towards greater decentralization of the protocol.
Lido V2 has two main components, the most user-oriented aspect being Ethereum withdrawals. This allows Ethereum bettors with Lido to remove the staking of ETH directly through the protocol.
The update to the Lido protocol on Ethereum allows Lido participants on Ethereum to burn their stETH and exit the protocol at a 1:1 ratio, achieving a key milestone of an open entry/exit ramp to the Ethereum staking ecosystem.
The new modular architectural design allows the development of access ramps for new node operators, ranging from individual bettors to DAO and distributed validation technology (DVT) clusters. This will create a more diverse validator ecosystem.
Available Blockchain Networks
Lido currently provides staking services for three cryptocurrencies: Ethereum, Solana and Polygon.
Ethereum: 3.5% APR with a total of $14,706,622,473 in staking.
Solana: 6.6% APR with a total of $66,842,111 in staking.
Polygon: 4.2% APR with a total of $74,634,970 in staking.
In the future, the protocol is open to incorporating new networks, or it may also stop serving some that you no longer consider. Previously, staking on Polkadot and Kusama was also available.
Tokenomics
At the time of the launch of the Lido DAO, 1 billion LDO tokens were created, of which 890,255,340 are in circulation as of today.
The distribution of these tokens is as follows:
DAO Treasury - 36.32%
Investors - 22.18%
Validators and signature holders - 6.5%
Initial Lido Developers - 20%
Founders and future employees - 15%
Possible Risks
Lido is a non-custodial protocol, eliminating the risk of censorship or asset freezing. Lido does not require participants to complete KYC verification. Their vision is to build a participation solution that is completely permissionless and secure for the blockchain itself.
However, there are a number of potential risks when staking using liquid staking protocols.
Smart contract security
There is an inherent risk that Lido may contain a vulnerability or error in the smart contract. The Lido code is open source, audited and is covered by an extensive bug bounty program to minimize this risk. To mitigate smart contract risks, all Lido core contracts are audited. The latest audit report can be found Hither. In addition, Lido is covered by an extensive Immunefi bug bounty program.
Penalty risk
Validators risk staking penalties, with up to 100% of funds at stake if validators fail. To minimize this risk, Lido stakes through multiple professional and refutable node operators with heterogeneous configurations, with additional mitigation in the form of self-coverage.
STToken price risk
Users run the risk of facing an exchange price of STTokens that is lower than the intrinsic value due to withdrawal restrictions on Lido, making it impossible to arbitrate and create a risk-free market. The Lido DAO strives to mitigate the risks and completely eliminate them as far as possible. Despite this, they may still exist and, as such, it is our duty to communicate them.
The Lido DAO strives to mitigate the risks and completely eliminate them as far as possible. Despite this, they may still exist.
Conclusions
The Lido Protocol represents a significant milestone in the field of staking in the crypto ecosystem. By effectively addressing the illiquidity challenge, Lido allows investors to maximize the potential of their staked assets by converting them into liquid tokens. This fundamental feature provides flexibility and freedom to use assets efficiently in other protocols or to carry out transactions without compromising shares.
Decentralization is a key pillar in Lido's philosophy. By enabling multiple validation nodes, the protocol increases network resilience and security, thus mitigating potential risks associated with centralization. This feature is essential in a cryptographic environment where trust and security are of paramount importance.
Lido's interoperability with diverse blockchain networks expands its reach and utility in the cryptocurrency ecosystem. This seamless integration capability strengthens its position as a valuable and adaptable solution for participants in the crypto community. Without a doubt, an alternative to consider if you want to obtain interesting returns on your cryptocurrencies in a decentralized way.
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