Lido DAO (LDO)
This documentation is intended to introduce the general user to the Lido project and serve as a guide for anyone developing software using Lido.
Introduction
Lido is the leading liquid staking solution, providing a straightforward way for users to earn rewards on their digital tokens. By staking with Lido, tokens remain liquid and can be utilized across various decentralized finance (DeFi) applications, enabling users to gain additional rewards. Lido is a family of open-source peer-to-system software tools operating on the Ethereum and Polygon blockchain networks, enabling users to mint transferable utility tokens called stTokens.
Lido tokens, which correspond to the amount of tokens staked, allow users to earn staking rewards from validation activities while remaining usable in other on-chain activities, such as DeFi protocols, providing liquidity and flexibility. Lido protocols batch user tokens, stake them with validators, and route them to network staking contracts, with users able to burn stTokens to initiate withdrawals of their stake and rewards. Governed by the Lido DAO, a decentralized organization where LDO token holders vote on protocol decisions, Lido ensures no single entity controls user tokens. By partnering with experienced node operators, Lido minimizes technical risks like slashing, combining user-supplied stakes with professional know-how for reliable operation.
| Ticker | LDO |
| Category | Infrastructure |
| Website | https://stake.lido.fi/ |
| @lidofinance | |
| Telegram | lidofinance |
| https://www.reddit.com/r/lidofinance | |
| Contract Addresses | |
|---|---|
| ethereum | 0x5a...32 Copied! |
| optimistic-ethereum | 0xfd...5fCopied! |
| polygon-pos | 0xc3...56Copied! |
| arbitrum-one | 0x13...60Copied! |
Key components of Lido
Staking pool
Lido employs a protocol to manage deposits, staking rewards, and withdrawals, with a separate staking pool for each supported network.
st[token]
Unlike traditional staked tokens, Lido's st[token] are freely transferable instead of being locked, as is the case with native staking. This feature allows users to leverage their staked tokens for collateral, lending, farming, and other DeFi protocols.
DAO
Lido's liquid protocols are managed by a Decentralized Autonomous Organization (DAO), which is responsible for selecting node operators, configuring protocol parameters, and more. The governance is implemented through the ERC20 LDO token, with Ethereum being a primary focus.
Node operators
Node operators are entities that manage a secure and stable infrastructure for running validator clients, ensuring the safety of user funds and the correctness of validator operations.
Liquid staking
Problem statement
Traditionally, staking in Proof-of-Stake (PoS) protocol-based projects involves locking tokens in one project for an extended period, with a fixed, predetermined staking reward. While this guarantees a return similar to a bond, it limits the opportunity to generate higher returns from the DeFi ecosystem. Users staking all their crypto holdings cannot invest or trade in more profitable crypto pairs on exchanges.
Solution
Liquid staking allows users to utilize st[token] in other trading opportunities, providing the benefits of staking rewards and returns from new trading ventures. Liquid staking offers several advantages:
- Simplifies the staking process by eliminating the need for hardware setup and maintenance.
- Allows users to earn rewards on small deposits, such as less than the 32 ETH minimum required by Ethereum.
- Provides st[token] as a building block for other applications and protocols, such as collateral in lending or other DeFi solutions.
- Offers an alternative to exchange staking, solo staking, and other semi-custodial and decentralized protocols.
Comparison with other staking options
Solo staking
Solo staking requires significant technical knowledge and a minimum deposit of 32 ETH (in the case of Ethereum). It also entails risks of slashing and offline penalties if managed improperly, and the staked amount is locked for a significant period.
SaaS staking
SaaS staking is similar to solo staking but involves trusting a third party, often centralized, which may act maliciously or be subject to regulation. There remains a minimum requirement of 32 ETH for Ethereum.
Centralized exchange staking
Staking through centralized exchanges can provide higher APR, but users do not receive a corresponding token, limiting their ability to engage in DeFi activities. Centralized entities may exert significant influence on the ecosystem, contradicting the fundamentally decentralized design.
Protocol APR
The Protocol Annual Percentage Rate (APR) refers to the gross annual percentage rate that encompasses both Consensus Layer (CL) and Execution Layer (EL) rewards. These are received by Lido validators relative to the total pooled Ether (ETH), estimated as a moving average over the last seven days.
Consensus layer
Validator rewards
In the Consensus Layer, validators earn rewards by performing specific duties, including attesting blocks, proposing blocks, and participating in sync committees. The rewards for each epoch are calculated from a base reward, which is the average reward received by a validator under optimal conditions per epoch. This base reward is inversely proportional to the square root of the total staked ether in Ethereum, meaning that as the number of validators increases, the reward per validator decreases.
Penalties and slashing
In addition to rewards, validators may face penalties and slashing. Penalties are reductions in a validator’s stake for failing to be online or not meeting certain criteria when attesting blocks. Slashing involves forcibly removing a misbehaving validator from the beacon chain, accompanied by penalties until the validator exits. These factors can diminish the APR.
Performance of Lido validators
The performance of Lido validators is crucial for the robustness and resilience of the underlying protocol. The effectiveness of the operator sets directly impacts the protocol's performance.
Execution layer
EL rewards
Following the Ethereum Merge, validators began to receive Execution Layer rewards, which consist of four components: priority fees, maximal extractable value (MEV) rewards, rewards socialization model, and protocol fee.
Priority fee
Priority fees are optional additional fees, potentially related to EIP-1559, paid directly to validators to incentivize transaction inclusion in a block. These fees vary with network demand.
Maximal extractable value (MEV) rewards
MEV refers to the maximum value that can be extracted by the validator from block production beyond the standard block reward and gas fees. This is achieved by including, excluding, or reordering transactions within a block.
Rewards socialization model and protocol fee
With Lido, stakers receive rewards within 24 hours of depositing, without waiting for validator activation. Lido imposes a 10% fee on staking rewards, divided between node operators and the DAO Treasury. This fee is subject to change following a DAO vote.
Security
Security is a top priority for Lido, with continuous efforts to improve it. Strategies include using a Decentralized Autonomous Organization (DAO) for governance decisions, conducting audits, electing top-tier validators, and enabling staking across multiple validators to mitigate risks.
Lido DAO
Structure and purpose
The Lido DAO is a Decentralized Autonomous Organization managing the liquid staking protocols by setting key parameters, such as fees and node operators, through the governance token (LDO) holders' voting power. The DAO collects service fees, which are used for research, development, and protocol enhancements.
Functions
The Lido DAO governs Lido to maintain efficiency and stability. Its responsibilities include:
- Building, deploying, updating, and setting parameters for liquid staking protocols.
- Managing node operators, including assigning and penalizing them.
- Approving grants for research and protocol initiatives.
- Handling payments to contributors and operational tasks.
- Running a bug bounty program and responding to emergencies.
- Accumulating service fees for insurance and development funds.
Governance
The LDO token facilitates Lido DAO governance, ensuring decentralized decision-making. LDO holders can vote on Lido's future, with voting weight proportional to the LDO amount held. The governance mechanisms can be upgraded alongside other DAO applications.
Software
The Lido DAO is built on the Aragon framework, providing tools for DAO governance. Easy Track, developed for routine governance proposals, reduces voter fatigue and gas costs, enhancing DAO growth by granting autonomy to sub-committees and node operators.