Lido DAO and its relevancy in 2023

Lido DAO is a decentralized autonomous organization (DAO) that operates the Lido protocol, in a few simple words. This protocol was originally created to basically transform the previous PoW ETH tokens into PoS, and then some. Since then, Ethereum managed to move entirely to PoS, but the protocol is still used widely enough.

Its name still gets featured in many headlines, but you might rightfully suspect that the relevant days of Lido have long since passed. You also wouldn’t be wrong to come to the conclusion that the organization has been shrinking its operation for some time. However, you can still draw some use from it.

Let’s see how useful this organization is for 2023.

About Lido DAO

Lido DAO was created in December 2020 as one of the many community protocols that allow the staking of Ethereum. Its fate is knit tightly with the fate of Ethereum 2.0.

Ethereum 2.0 has been the center of many discussions for the past few years. It’s a network, whose main goal is to transform Ethereum from PoW (Ethereum 1.0) to Ethereum PoS (Ethereum 2.0). It was a herculean task, which is now complete as of 2022. Indeed, all Ether is now 100% proof-of-stake.

Before that happened, though, you had to transform your tokens manually through a variety of protocols if you wanted your ETH to be compatible with Ethereum 2.0. Lido is one of those protocols. In the past, it was one of the primary ways of staking your Ether—a valuable bridge between 1.0 and 2.0.

This, as well as the protocol’s main purpose, has shifted since then.

LDO

LDO is the governance token used on Lido DAO. It’s mostly there to fuel the consensus mechanism, enabling people to vote on changes in the protocol. You need to obtain a certain amount of LDO if you want to take part, staking it and earning more LDO by participating in the governance protocols.

After a while, you can liquidate your LDO savings. Unfortunately, they don’t have much bearing on what you can do within the protocol. It’s just a token for inner use. It can be sold freely on the market, but its price has been all over the place. Interestingly, it was in a bullish mood for much of the 2023. However, it’s not really a trustworthy token as far as trading goes.

How Lido used to be

While it was previously about making your tokens more liquid and tradeable, Lido is now about making money.

Previously, the core model of this protocol was about this:

You take a certain amount of PoW tokens or tokens that aren’t ETH-compatible.
You stake these tokens, receiving a staked variety of the same currency.
This staked variety is more liquid and compatible with DeFi solutions, making it easier for you to trade them.
While you trade these, you receive a passive income from the staking process.
As a result, you improved the liquidity of your money (mostly ETH) and earned some passive income.

The ‘passive income’ part still works. While Lido says that the stETH you receive is more liquid than regular ETH, it’s not really been the case since late 2022. Ever since the network became a proof-of-stake blockchain, there isn’t really a need to make your ETH more ‘liquid’ by wrapping it in a proof-of-stake coating.

Defining stETH

Staked tokens, like stETH, are basically a separate currency from their non-staked counterparts. The gist is that you entrust protocols, like Lido, with a certain amount of non-staked tokens (ETH, MATIC, or SOL). They are then locked inside a special, secure smart contract. In exchange, you receive the same amount of stETH, stMATIC, or stSOL.

The ‘exchange’ rate is 1:1. While your regular ETH, MATIC, or SOL is held in that smart contract, you can do whatever you want with the staked variety. They have the same exact price because each of these tokens is collateralized with the original back in some contract on Lido.

They can be sold on a wide variety of exchanges, mostly Ethereum-friendly exchanges. There isn’t really any discrimination against these tokens, although they are somewhat irrelevant now. Regular ETH is just as technologically compatible with Ethereum 2.0 as stETH ever was. For this reason, stETH seems to be phasing out gradually.

StETH also allowed you to take part in the governance processes on Ethereum 2.0, but it is now completely supplanted by basic Ether.

Staking ETH

Staking is the central process for these PoS networks. In the main network, like Ethereum itself, you stake them to receive a certain amount of voting power, enabling you to take part in governance. The process is similar on Lido, but the output you receive for staking your coins here is different.

In addition to receiving an equal amount of staked tokens, you also receive passive income at a fixed, predetermined rate. It essentially works like a savings account in a classic bank. The income is in the same currency as your deposit. You can withdraw the accumulated crypto at any point.

This provides you with a score of great advantages:

Passive income. Crypto dividends are a good way to earn passive income, and passive income is always a welcome addition to one’s budget.
Long-term investment. Staking is a good long-term investment opportunity. You won’t get any immediate large profits, but the long-term output is excellent.
Diversification. Diversifying your crypto portfolio is a good way to protect yourself against market risks. In this sense, you diversify it by including a third option into your routine besides just buying and selling.

It’s a great way to be financially active with your ETH. While savings accounts don’t let you do anything with your money, you are actually given the same amount of staked ETH while your regular money is locked up. In this sense, it’s an additional benefit, and there aren’t really any tangible downsides to this arrangement.

You do need to liquidate your collateral if you lose the stETH they’ve given you — that’s the main idea behind collateral, after all. However, if you manage to trade your stETH sensibly (or if you decided not to trade them at all), there’s very little to worry about. You’ll be able to just sit back and watch your savings grow.

Summary

Is Lido a relevant organization? Yes, but not in its original sense. Before, it was a valuable bridge between Ethereum 1.0 and Ethereum 2.0. Since the two merged in 2022, this function has become obsolete. You can still make use of Lido and get quite a lot of benefit out of it. Staking, after all, is still a great way to make money.