Polygon Warrior of Decentralized Staking - Lido Finance

2022-08-16, 15:49

TL;DR

Lido Finance is a non-custodial ETH 2.0 decentralized staking service platform.
Advantages of "polygon warrior": low threshold, low cost, decentralization, DAO governance, security.
Lido, as the leading protocol of ETH staking track, will undoubtedly be the most direct beneficiary.
After Ethereum is converted to the PoS mechanism, it will attract more powerful competitors competing with Lido. Full article

What Is Lido Finance

Lido Finance is a non-custodial ETH 2.0 decentralized staking service platform.

Users can invest ETH of any unit on Lido to participate in the staking of Ethereum 2.0 without setting up a node, the staked token stETH can freely circulate through the AMM mechanism of DeFi to participate in other services in the DeFi market.

In July this year, the crypto market gradually stabilized after a sharp fall. In the process of the bear market correction, Lido, as the leader of the DeFi protocol, rose in volume and price in just one month, and captured nearly $2 million in revenue. TVL (total value locked) increased to $8.5 billion, surpassing the DeFi leaders such as Aave, Curve and UniSwap, and second only to MakerDAO. Lido has become a star project in the recent crypto market. It has made a strong breakthrough in the poor and sluggish market circumstances, It has become the highest staking platform of TVL, ranking second in the total value locked (TVL) of the DeFi ecosystem.

Advantages of "Polygon Warrior"

In the industry, it is customary to call the project team with excellent comprehensive ability as a "polygon" project. Lido's outstanding performance in "threshold, cost, degree of decentralization, DAO governance and security" is also known as "polygon warrior" in the DeFi field. Now Lido is developing rapidly. We analyze its following advantages:

1. Low threshold
Lido eliminates the multiple threshold where users can only stake 32 ETHs based on the standard ETH 2.0. For users, ETH (or other L1 assets) holders can deposit their tokens into Lido's smart contract and receive stETH at a ratio of 1:1.

As a derivative, stETH represents the requirement of staked ETH allocated to the validator. stETH is also an elastic supply token, which can accumulate inflation rewards and trading costs, and can be used and traded like any other ERC-20 token.

2. Low cost
Lido's management fee is only 10% of the staking reward, which is the lowest in all protocols, thus transferring more investment returns to the staked users.

3. Decentralization
As we all know, the centralized exchange adopts the custodial system, that is, the user's tokens will be hosted in the exchange wallet, and it is easy to establish an ETH staking pool. These collected user assets can be used to eliminate the minimum 32 ETH staking requirement and stake on behalf of the user to eliminate the burden of the user's operation validation node.

Meanwhile, most of the above exchanges provide liquidity release services for the staked assets, that is, allowing users to withdraw the staked ETH in advance. From the process of staking ETH and obtaining earnings, users do not need and do not have permission to participate in intermediate links. Although this method makes staking simple, it also creates the problem of insufficient transparency.

In other words, you don't know whether your ETH has actually been staked and where it has been staked. In most cases, it has little impact. However, from the perspective of this Ukraine-Russia conflict, some CEX platforms, for example, will directly freeze users' property and accounts under special circumstances, while users can do nothing else but feel helpless.

However, Lido adopts a non-custodial decentralized protocol. The user's ETH is not completely hosted by the node, but authorized by the smart contract, which eliminates all kinds of risks that may be brought by the centralized organization. Presently, Lido has established cooperative relations with more than 30 node operators. The number of validation nodes is nearly 130,000, and the degree of decentralization is much higher than the other four ETH staking protocols.

4. DAO governance
The management mode of each centralized exchange determines that its transparency and efficiency are far less than the autonomy of DAO. When users stake at the exchange, they do not know which validation node their Ethereum has gone to, nor can they validate the security and profitability of the nodes. This part of the research is conducted by the relevant sectors of the exchange.

However, in Lido, this part of the process is completed by the DAO autonomously: members decide the selection of validation nodes through Snapshot voting, and the DAO completes the investigation and supervision of the nodes. It is superior to the centralized exchange in terms of transparency and security.

Lomashuk, the co-founder of Lido, once stated: the DAO structure is crucial for Lido to achieve the integration of products and markets, because it is the only way for the group to build trust in its community. Relevant personnel of A16z have also stated that the most remarkable thing about Lido is the security and transparency brought by its DAO governance.

Like most projects, Lido DAO's voting power comes from the holding of the platform token LDO. The more LDO is locked in the user's voting contract, the greater the decision-making power the voter gets.

5. Security
According to Paradigm's report, the existence of Lido's stETH will make the security of the Ethereum network better. It is because stETH will increase the difficulty of attacking the Ethereum Network. If the staking cost of staking derivatives (Lido's stETH) is reduced, they may lead to more (or even all) ETH being staked.

The higher the liquidity of stETH, the lower the opportunity cost of staking, which leads to more ETH being collateralized, further deepening the liquidity of stETH.

Lido, as the "polygon warrior" in the DeFi world, has a lower entry threshold and is more friendly to investors. Compared with other protocols of the same type, Lido has the largest number of cooperative projects, built a rich DeFi ecosystem, created more application scenarios for staked tokens, and also improved its liquidity. Lido has a clear leading edge in each subdivision module, or it will help Lido play a stronger network effect.

Impact on Lido after Merge

On August 12, Vitalik Buterin, the co-founder of Ethereum, tweeted that the total terminal difficulty (TTD) had been set to 58750000000000000. This means that the Ethereum PoW network now has a (roughly) fixed number of hash values to mine. bordel.wtf predicts that the Merge will take place around September 15, when Ethereum will complete the major transformation from PoW to PoS mechanism.

As the largest PoS staking service provider on Ethereum, Lido's transformation from consensus mechanism to PoS will further stimulate the demand of staking users, as can be seen from the current growing data on the chain.

Since the announcement of the date of Ethereum Merge, 19 large influencers have purchased more than 8.56 million LDO tokens in total, pushing the price to $0.94, creating an increase of approximately 51%. Since the announcement of the Merge date, as of the time of writing, the price of LDO tokens had risen to approximately $2.50, and the market value exceeded $2.5 billion.

Presently, the process of Ethereum Merge is steadily advancing. From the data, every successful Merge of the test network will greatly boost the confidence of the staking users. Lido, as the leading protocol of ETH staking track, will undoubtedly be the most direct beneficiary. The possibility of a successful Ethereum Merge has increased, which not only gives the original Lido users the confidence to continue to stake, but also makes Lido more attractive to new users who intend to participate in the staking.

Lido's Risks

However, we should also clearly realize that Lido's current advantages are obtained by subsidies to a certain extent. In fact, they are not unbreakable. Especially after the transformation of Ethereum to PoS makes the cake of the entire ETH 2.0 ecosystem bigger, it will attract more powerful competitors.

When the Ethereum Merge is officially converted to PoS, users will be allowed to withdraw the staked ETH from the beacon chain (consensus layer). It will also reduce the positive significance of the anchoring stability of Lido's stETH to a certain extent.

In addition, Lido's heavy reliance on Ethereum itself is like a sword of Damocles hanging over its head. Any setback in the Merge schedule or implementation may lead to disastrous consequences.

Currently, it is still approximately one month before the formal Merge of Ethereum. Any adverse events in the process will affect the exchange ratio of ETH: stETH, such as the further extension of the transition period, the trust crisis around the transition itself, and the black swan security events that occur continuously in the DeFi field.

Conclusion

The Ethereum Merge is the hottest event in the market at present. Whether PoW is about to become history is not a question. As the PoS mode gradually becomes the mainstream of the crypto world, ETH also uses the PoS mode to completely replace physical mining to solve the problems of resource waste and low efficiency. At least presently, it is more conducive to sustainable ecosystem development.

Maybe one day in the future, all ETH will be staked. As predicted by Paradigm, all tokens circulating in the market will be stETH. For decentralized protocols such as Lido, when more funds flow in, it will be a continuous challenge to better protect the unavoidable code security and user assets in the DeFi world.

Author: Gate.io Observer: Byron B. Translator: Joy Z.
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