Lido is a liquid staking solution for Ethereum and other PoS chains (such as Solana, Polygon, Polkadot, and Kusama). Lido lets users stake their assets with no minimum deposits or maintaining of infrastructure, whilst participating in on-chain activities, e.g. lending, to compound returns. By staking with Lido, users' assets remain liquid and can be used across a range of DeFi applications, earning extra yield.
Take Ethereum as an example. Ethereum is a Proof-of-Stake blockchain, $ETH holders can stake their $ETH into a staking contract and take responsibility to validate new transactions in the Ethereum 2.0 network. If they behave well, they get new $ETH as rewards. However, if they behave badly and do not complete the validation job, their staked $ETH will be slashed.
To be a validator is not a small commitment:
- One can only apply to become a validator by staking 32 $ETH first. 32 $ETH is not a small amount of money.
- Validators are expected to maintain sufficient hardware and connectivity to participate in block proposing and transaction validation.
- The deposited tokens are locked into the staking contract and cannot be used for other purposes. What is worse is the current setting does not allow withdrawals once the $ETH is deposited into the staking contact until Ethereum 2.0 officially goes online. Therefore, liquid staking protocols emerge to provide a solution to release liquidity for the locked staked $ETH.
As being a validator of Ethereum 2.0 requires large minimum capital, technical complexity around the validation process, and extended lockup periods. Ordinary $ETH holders lack professionalism as a validator and do not want their assets to lose liquidity after being staked. Therefore, Lido, a liquid staking service protocol, emerged to solve these problems.
Lido allows users to deposit their $ETH into Lido's protocol, which then delegates the staked $ETH to professional validators (aka node operators). At the same time, after staking $ETH into Lido, users will receive a derivative asset - stETH issued by Lido, representing the ownership of the staked $ETH.
Once the node operators receive the staked $ETH entrusted by Lido, it will be used for Ethereum 2.0 transaction validating. Node operators receive $ETH rewards (staking rewards) for transaction validating. After deducting the fees to node operators and Lido's staking pool service fee, the rest of these rewards accumulate into users' staked $ETH.