Analysis

There’s a decentralized autonomous organization (DAO) that lets ETH holders back Ethereum 2.0 without losing liquidity, and it wants to give its participants a vote.

Until Feb. 12, ETH holders have a chance to earn some of the governance token for Lido, a new decentralized finance (DeFi) and staking protocol. There will be other opportunities in the future, but it’s up to LDO holders to decide when.

Since Tuesday, the amount of ETH staked on Lido has more than doubled, breaking 60,000 ETH as of this writing.

Lido sits at Ethereum’s sweet spot, putting the road to Eth 2.0 into DeFi. It gives people a fresh way to contribute ETH to staking on Ethereum’s new beacon chain but still unlock the value of their ETH. It’s one of those stories that somewhat strains credulity, very much an only-in-DeFi kind of scenario. So far it’s working.

Kraken has already rolled out a similar product and Coinbase plans to, but those lack the element of distributed trust.

An early backer of Lido and a member of its DAO, Aave’s Stani Kulechov, told CoinDesk over Telegram, “Tokenized staking ETH is interesting, because you can use the tokenized staked ETH as collateral (for example in Aave) and get more liquidity in ETH so you can leverage quite a lot in Eth 2.0 staking, I’m curious to see how much leverage there will be in staking.”

Additionally, Lido has a governance token but it’s taking a unique approach to distributing it. Unlike Compound’s COMP, which announced a yield farming plan that ran forever or Yearn which unloaded it all super fast, Lido is parceling out its governance token as its stakeholders see fit. 

Lido’s governance token is called LDO. There are 1 billion of the tokens and 64% of them are dedicated to the founders and other early participants who got Lido off the ground, but that giant stash is locked for a year and then will be parceled out (vested) over the following year. 

But, about 360 million tokens are in the DAO treasury, but only 4 million tokens have ever been made liquid, before the new distribution that started on Jan. 13. 

These 4 million were distributed before LDO was announced, to “early stakers and DAO treasury tokens.” 

The distribution that just began, to depositors in the stETH/ETH pool on Curve, will pass out another 5 million LDO until Feb. 12. To get access to the airdrop, users simply need to contribute to Curve’s stETH/ETH pool, and then stake the liquidity provider (LP) tokens they receive into Curve’s gauge. Step-by-step instructions are detailed on the Lido blog. 

As an added benefit, holders who do so will also earn Curve’s CRV token

As of this writing, LDO is trading right around $1 each.

What is Lido?

Lido is a DAO that’s meant to give users a way to their ETH behind the new iteration of Ethereum without really sacrificing its liquidity. The team spelled it out in a primer. The fact that this works is somewhat remarkable.

As we’ve previously reported, once a user commits their crypto to Eth 2.0 staking, it very likely won’t be available until 2022 at the earliest (though wonders may never cease). Regardless, once the ETH is in, there’s no turning back. 

Those who deposit ETH into Lido to stake for Eth 2.0 will receive stETH in return, which stands for staked-ETH. 

This is the part that will sound somewhat unbelievable to outsiders: This version of ETH is basically trading at parity with regular ETH.

On the downside, stETH is a token on Ethereum, which means it can’t be used to pay gas. That would seem to suggest that it would have less value. On the other hand, stETH earns a return from staking, and ETH does not. So maybe the two balance each other out. 

Last month, CoinDesk estimated that each validator was earning about $6 per day in ETH, but the earnings are locked up too.

But stETH gets those earnings in the form of fresh stETH. It’s a cryptocurrency that rebases every day, like Ampleforth. Anywhere it resides, more stETH will appear. Users can trade it away and whomever receives it will begin earning the returns the former holder had. 

Ethereum 2.0 distributes a fixed amount each day among stakers, so the more ETH goes in, the less each staked ETH earns, so users will earn the most ETH at the beginning of their stake.

“Right now based on the amount of people that are staking, the rate is around 11.1%,” Lido’s marketing lead, Kasper Rasmussen, told CoinDesk in a phone call.

Backers don’t get 100% of the returns; 10% is set aside for the DAO, for now largely funding its insurance against slashing. Eventually it will likely designate some of the returns to pay validators.

As of this writing, just under 63,000 stETH have been minted, held in just under 1,500 addresses.

Who is doing the staking?

Staking service providers are chosen by the DAO. Users staking ETH don’t get to choose which staker their ETH goes to when they put it into Lido. 

“To become an approved operator for LIDO it is discussed by the LIDO community and it is voted on by token holders,” Rasmussen explained. 

The stakers are currently well-known staking companies in the space. The current staking providers are all members of the DAO, Stakefish, Staking Facilities, P2P, Certus and Chorus One. Any company can propose joining via the Lido DAO governance portal on Aragon.

Who got it started?

The Lido DAO members are “Semantic Ventures, ParaFi Capital, Terra, KR1, P2P Capital, Bitscale Capital, Stakefish, Staking Facilities and Chorus One, Rune Christensen of Maker, Stani Kulechov of Aave, Banteg of Yearn, Will Harborne of Deversifi, Julien Bouteloup of Stake Capital, Jordan Fish and Kain Warwick of Synthetix,” Rasmussen wrote in an email.

They contributed $2 million collectively to get the project off the ground.  

Why Curve?

Rasmussen said that the advantage of Curve is that it has accounted for the rebasing factor of stETH. Using a traditional automated market maker (AMM) that simply runs on the ratio of the two tokens in the pool, the daily change can throw the balances out of kilter. 

“The risk is here if you’re providing liquidity, instead of getting your daily staking rewards there’s a risk that it’s arbitraged away by other traders,” Rasmussen said.

The creator of Curve, Michael Egorov, said it was a relatively simple fix, one they had already dealt with via Aave tokens. “We do support the way stETH works (e.g. growing in quantity like Aave aTokens rather than increasing every token’s value as staking is going),” he told CoinDesk in an email.

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