Lido DAO — the first management protocol for liquid steaking

Decentralised Autonomous Organisations (DAOs) have become one of the main vectors of blockchain ecosystem development and decentralized finance (DeFi).

A DAO empowers ecosystem participants to influence decisions on project development through voting. Each user can purchase the management tokens used for voting and get the right to vote for it.

What is and how does the Lido DAO work

Lido was the first liquid steaking protocol on the Ethereum network. The point is that only network validators, who process transactions and mine new blocks, can bid, i.e. "steak" ETH coins. The minimum threshold for steaking is 32 ETH or about $50,000 at the current exchange rate.

In addition, it is not enough just to have 32 ETH to access steaking: there is a whole set of rules and requirements for launching validator nodes, only after the fulfillment of which they can claim to be a full-fledged participant of the network.

The Lido protocol has solved this problem by offering an alternative — liquid steaking. Here's how it works:

The user bets in ETH and, in return, receives wrapped stETH liquidity tokens.
The Lido protocol stacks ETH as a validator, and the user gets a share of the rewards for the delegated coins. In addition, the delegator is left holding tokens (stTokens) that they can use at their discretion, such as adding to liquidity pools to generate revenue in DeFi or using as collateral for loans in different tokens.

The Lido protocol launched in December 2020, just a couple of months after the launch of Beacon Chain — almost at the peak of DeFi's heyday. With the advent of Beacon Chain, ETH staking became possible for the first time, but due to the high entry threshold, few users were able to stack coins. According to CryptoQuant, a total of nearly 29 million ETH have been staked, which is about 24% of the total number of all coins in circulation.

Besides Ethereum, the Lido protocol supports Polygon and Solana networks. However, the protocol may soon abandon the latter: the DAO community voted to leave the Solana ecosystem. The team recently announced that it will stop supporting the Polygon network.

In essence, Lido is a DeFi protocol — a decentralized application (DApp) based on Ethereum. DApp applications like Lido have their own smart contracts, the security of which has nothing to do with the network itself. The Lido protocol has passed security audits from companies such as Statemind, ChainSecurity, Oxorio, Hexens, Certora, Sigma Prime, and MixBytes.

Governance

DAO serves as a compromise between centralisation and decentralization. This approach considers the community's interests: some ecosystem members can put forward proposals themselves, while others can vote for or against them.

Lido DAO is based on Aragon, which provides tools for creating transparent and reliable decentralized autonomous organizations. However, to handle routine operations more efficiently, the Lido team has developed an Easy Track mechanism that balances convenience and security.

The Lido protocol team donates part of its revenue to the DAO Insurance and Development Fund and can fund initiatives proposed by the community. Here are some of the functions performed by members of the DAO community:

Developing and updating key protocol parameters, such as staking percentages, reward distribution, and more;
Appointing and removing node operators (validators). DAO members can validate and categorize the performance of node operators and penalize those who break the rules;
Approving LEGO grants to support research and protocol guild initiatives;
Paying income to contributors (stakers) and other operational duties;
Bug Bounty programme initiated to respond to security incidents;
LIdo revenue distribution, e.g. determining the share to be directed to the DAO insurance and development fund.

LDO token

LDO is a Lido DAO management token that holders use to vote on systemically essential decisions. The LDO token trades at $1.53 and is among the top 40 cryptocurrencies in terms of capitalization, which exceeds $1.35 billion.

The maximum number of tokens is 1 billion LDO, of which 890 million (89%) are already in circulation. The token can be bought on major centralized and decentralized exchanges (DEX) such as Uniswap, PancakeSwap, Sushi, Curve and Balancer.

The LDO token started being listed in February 2022. The price reached as high as $11 but has since declined until September 2022, falling to a low of $0.52. After that, the price gradually rose like many popular cryptocurrencies.

Benefits of Lido

The possibility of steaking any amount of ETH;
No need to launch a validator node, which requires technical skills and additional resources (dedicated server);
Minimal actions: it is enough just to connect a cryptocurrency wallet and steak ETH;
Staking is one of the most reliable ways to generate income in cryptocurrency: the security of assets is ensured by the network's smart contract. Individual protocols have centralized vulnerability points;
Unlike direct steaking, Lido users can withdraw cryptocurrency at any time: validators, after an ansteake request, can withdraw ETH only after 256 epochs (about 27.7 hours);
In addition to income for staking, users receive liquidity tokens through which they can earn additional income (liquidity mining, farming, lending, and so on).

Prospects of Lido DAO

In the near future, the protocol may become one of the systemically essential projects in the Ethereum ecosystem. Statistics show that even during the bear market period, the demand for Ethereum staking continues to grow rapidly: in the last year alone, the number of steaked coins increased by 86% from 15.5 million to 28.9 million.