The Bankless Guide to Lido

Updated June 2023
Jun 16, 2023 โ€ข 3 min read

Ethereum, the world's second-largest cryptocurrency by market cap, has popularized the concept of staking, a process that allows holders to earn rewards by participating in the network's security. Among the various staking solutions, Lido presently stands out as the largest liquid staking protocol, thus playing a big role in Ethereum's contemporary staking ecosystem.

What is Lido

Lido is a decentralized liquid staking solution that operates on Ethereum, Solana, and Polygon blockchain networks. It allows users to stake their tokens and earn rewards without locking up their assets. When you stake crypto with Lido, you receive utility tokens (e.g. stETH for ETH, stSOL for Solanaโ€™s SOL, and stMATIC for Polygonโ€™s MATIC) in return. These tokens represent your staked assets and the rewards they earn.

By far the most popular token minted by Lido is stETH, which represents staked ETH. The value of stETH is pegged to the value of ETH, and it increases over time as staking rewards are accrued.

Why Lido?

Lido offers several benefits for stakers.

  • ๐Ÿช™ It eliminates the need to run your own node, which can be technically challenging and time-consuming; e.g. simply buy stETH to stake!
  • ๐Ÿ’ธ It also allows you to stake any amount of tokens, unlike Ethereum's native staking system that requires 32 ETH.
  • ๐Ÿ’ฑ Lidoโ€™s staked tokens like stETH are usable in DeFi, e.g. as collateral in borrowing protocols like Maker, so you can stay liquid while making the most of your crypto with passive staking income over time.

Governance in Lido

Lido operates under a decentralized governance model. LDO token holders have the power to make decisions about the protocol's future. They can vote on proposals and influence key aspects of the protocol. Lido also has various security measures in place to protect stakers and ensure the smooth operation of the protocol.

How to stake ETH on Lido

Staking your ETH on Lido is a straightforward process that can be completed in a handful of steps. Here's a simple guide on how to do it:

  1. ๐Ÿ‘› Connect Your Wallet: Visit the Lido Staking Portal. Click on "Connect Wallet" at the top of the page. You'll need to connect a Web3 wallet, such as MetaMask, that contains the ETH you wish to stake.
  2. ๐Ÿ”ข Enter the Amount to Stake: Once your wallet is connected, you can enter the amount of ETH you want to stake in the "ETH amount" field.
  3. ๐Ÿ’Ž Stake Your ETH: After entering the amount, click on the "Submit" button to initiate the staking process. You'll need to confirm the transaction in your wallet.
  4. ๐Ÿ™Œ Receive stETH: Once the transaction is confirmed, you'll receive an equivalent amount of stETH tokens in your wallet. The exchange rate is 1 ETH = 1 stETH. These tokens represent your staked ETH and the rewards they earn.
  5. ๐Ÿ” Monitor Your Staking: You can monitor your staking rewards and the total amount of ETH staked with Lido on the same page. The current annual percentage rate (APR) for staking ETH on Lido is displayed (5% right now), along with the total staked ETH and the number of stakers.

Before diving in, note that there's a 10% staking rewards fee applied by Lido, which is used to support the operation and development of the protocol.

Risks of Lido

Participating in Lido, as with any DeFi project, comes with its own set of challenges. It's essential to be aware of these challenges before you decide to stake your ETH. Here are some of the potential risks you might encounter when staking on Lido:

  • ๐Ÿœ Contract Vulnerability Risk: Lido's operations are based on smart contracts. Despite the fact that the code is open-source, has undergone audits, and is protected by a comprehensive bug bounty program to reduce risks, the possibility of bugs or vulnerabilities in the smart contracts always exists.
  • ๐Ÿ—ก๏ธ Slashing Penalty Risk: Validators on Ethereum could face penalties if they fail to fulfill their responsibilities properly. Lido addresses this risk by distributing stakes across several professional and trustworthy node operators with varied configurations. Furthermore, Lido maintains an insurance fund, financed by its fees, to provide additional risk mitigation.
  • ๐Ÿ“‰ stETH Value Risk: The market price of stETH could potentially fall below its intrinsic value due to Lido's withdrawal limitations, which could hinder arbitrage and market-making activities.

Additional Lido resources

To dive deeper into Lido, consider exploring the following resources:

  1. ๐Ÿ“š Lido's FAQ
  2. ๐ŸฆŽ Coingecko LDO hub
  3. ๐Ÿฆ™ DeFiLlama Lido dashboard

Zooming out

In conclusion, Lido offers a compelling solution for those interested in staking on Ethereum, Solana, and Polygon. It combines the benefits of earning staking rewards with the flexibility of maintaining liquidity, making it an attractive choice for both new and experienced stakers.

Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.

Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here.

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