Analyze Lido Finance

2022-08-15, 10:44

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## [TL;DR] 
 Lido finance is a decentralized staking protocol that enables users to stake their crypto assets while maintaining the liquidity of their funds.

Some of the components of Lido include staking service, derivative tokens, DAO and governance tokens.

When you stake your crypto assets on Lido, you receive a derivative token in a 1:1 ratio which acts as a receipt for your tokens being staked on the network.

The benefits of Lido finance include liquidity, decentralization, semi-custodial service and a user-friendly interface.

## lido.fi
Staking crypto assets as a source of passive income has sparked a lot of interest among investors in recent months. Staking as a service has also grown so large that it is now considered a separate sector in the crypto world. This service is expected to grow at a rapid pace in the future.

According to a 2021 JP Morgan report, the staking industry is currently worth $9 billion in annual revenue and is expected to grow to $40 billion by 2025. One of the driving factors behind this is the expected <a href="/ja/price/ethereum-eth" target="_blank" class="blog_inner_link">Ethereum</a> Network's transition from Proof of Work (PoW) to Proof of Stake (PoS) consensus mechanism. Staking can be done by running a validator node or using a staking service. The infrastructure requirement and technical know-how to run a validator node which may not be readily available for an average investor, have attracted more traction to staking service providers. One of the prominent staking service providers that help overcome this challenge is Lido Finance.
## What is Lido Finance?
Lido Finance is a liquid self-staking protocol that enables users to stake their crypto assets on a Proof of Stake (PoS) blockchain network while maintaining the liquidity of their funds. When you deposit ETH on Lido Finance, it is transferred to Lido's Staking Contracts. They are decentralized staking contracts that collect funds from users and distribute them to node operators. Unlike centralized staking service providers, the node operators do not have custody of your funds; thus, the protocol is designed to operate in a non-custodial environment.
In addition, whenever you stake your crypto assets on Lido, you receive a derivative token in a 1:1 ratio. When you stake your ETH (Ether) tokens, for example, you receive an equivalent amount of stETH (Staked ETH) token, which acts as a receipt for your ETH tokens being staked on the network.
### Use cases of the sETH Token
· You can use sETH token to contribute liquidity to the stETH Liquidity pool on Curve and earn rewards;
· You can deposit stETH on Yearn Finance to maximize your yield;
· You can lend your stETH on AAVE and earn interest.
· You can sell your stETH on many exchanges.
## Key Features of Lido Finance
### 1. Staking Service:
The primary product of Lido Finance is staking as a service. The funds you stake are kept in a non-custodial manner, and the protocol provides you with liquidity by issuing a derivative such as stETH (Staked ETH). The platform revenue model is the 10% fee it charges on the staking reward. Lido's most popular staking service is for the Ethereum 2.0 network, which allows you to stake your ETH Tokens. The protocol holds 16.17% of the total ETH staked on the Ethereum Network, which is significant.
### 2. Derivative token:
As previously stated, you get a derivative token in a 1:1 ratio when you stake a crypto asset on Lido. So, if you stake an ETH token, you will receive stETH. If you stake a <a href="/ja/price/polkadot-dot" target="_blank" class="blog_inner_link">Polkadot</a> token, you will receive stDO, and so on. These derivative tokens now have a variety of applications.

**Lido cryptocurrency listings**

Lido allows you to stake more than just ether. The following chains collaborate with Lido:

StSOL can be staked with <a href="/ja/price/solana-sol" target="_blank" class="blog_inner_link">Solana</a> (SOL). The APR is approximately 5.5%. In the meantime, your staked SOL is still operational throughout the Solana ecosystem.

<a href="/ja/price/kusama-ksm" target="_blank" class="blog_inner_link">Kusama</a> (KSM) is a possible stake for stKSM. The annual percentage rate is 21.1%. Take advantage of your KSM's daily stake rewards. Your stKSM works in DeFi on the Kusama and Moonriver ecosystems.

StDOT can be staked with Polkadot (DOT). The average APR is 16.5%. Every day, you will receive DOT staking rewards. Allow your stDOT to send DeFi work to the Polkadot and <a href="/ja/price/moonbeam-glmr" target="_blank" class="blog_inner_link">Moonbeam</a> ecosystems.

<a href="/ja/price/polygon-matic" target="_blank" class="blog_inner_link">Polygon</a> (MATIC) stakes are available for stMATIC. The current APR is 8.7%.
### 3. Decentralized structure and DAO:
Lido Finance DAO manages the protocol decision-making through the voting power of governance tokens. This system keeps a platform decentralized and allows it to operate without a centralized authority.

Its governance token, LDO, also governs <a href="/ja/price/lido-dao-ldo" target="_blank" class="blog_inner_link">Lido DAO</a>. The number of LDO tokens locked by a user in the voting contract determines voting power on the DAO.

Lido DAO is primarily responsible for service fee collection, asset insurance on the protocol, research and development, protocol upgrades, and so on.
### 4. Governance token LDO
LDO is Lido Finance's internal governance token. It is the foundation for Lido DAO, which eventually governs and preserves the platform.
An LDO holder would need to stake his token in the Lido Voting Contract to exercise his voting right in Lido DAO. A token holder's voting power is proportional to the number of tokens locked in the contract.

You can also deposit LDO tokens in Liquidity Pools on exchanges to earn extra money.
## Lido Finance and the Current Events
For about six-month since the beginning of the year, the total value locked (TVL) within the DeFi ecosystem has declined. However, July marked something new as TVL across many protocols began to recover.

According to available data, TVL rose 18% last month to $68.98 billion.

After falling 74% between May 4 and June 30, Lido Finance's TVL has begun to recover, albeit slowly. TVL on the platform is $7.76 billion, up 39% since June 30. It came in second place to MakerDao, which led the entire ecosystem with a TVL of $8.8 billion.

Lido Finance has a market share of 11% in the $68.98 billion TVL market, with $7.76 billion in TVL. Lido Finance's TVL increased in the last ten days with the rally primarily due to general price increases in many other crypto assets and increased staking with Lido on alt-chains.
However, Lido's share of total ETH has decreased significantly since May 29. Furthermore, the APR offered to Lido investors has been steadily declining since the beginning of the year. The APR was 4.93% in January, pegged at around 4.07% after falling by 17% in about eight months.
## Benefits of Lido Finance
**Non-Custodial in Nature:** staking on Lido is non-custodial, giving you greater control over your stake.

**Easy staking:** you can earn daily rewards by staking their assets, and the number of tokens that users can stake is not limited.

**Maximized earning potential:** All platform users can use their assets as collateral for lending and other activities. These tokens can also be used to boost the current yield.

Quality audits Quantstamp and Sigma Prime audit Lido smart contracts.

**A variety of wallets:** Although Lido does not have its wallet, it allows users to use popular ones on the market, such as TrustWallet and MetaMask.
## Limitations of Lido Finance
Smart Contract Risk – The smart contract is prone to hacking despite the regular audit.

The volatility of derivative tokens: Lido's derivative tokens (stETH) value and utility depend on Lido Platform adoption.

Slashing penalties: If a node operator violates the network, the entire system is subject to slashing penalties.

Tax: The staking rewards may be taxable, but with no provision for reporting help.

Limited application of the native token: The applications for LDO tokens are minimal.
## Conclusion
The road to Ethereum 2.0 is merged with DeFi by Lido. The protocol provides users with a novel way to stake ETH on Ethereum's new beacon chain while retaining access to the value of their ETH.

Even though Lido has raised eyebrows in the DeFi world, it is a project everyone in crypto should watch. With its user-friendly interface, ease of use, long-term APYs, and community of devoted supporters, it's safe to say Lido finance ups the ante and is here to stay.
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<div>Author:** Mashell C.**, Gate.io Researcher
<div class="info-tips">\*This article represents only the views of the researcher and does not constitute any investment suggestions.
<div>\*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.
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