What Is Lido Finance, Ethereum's Largest Liquid Staking Project?

Republished By Plato

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In brief

Lido Finance is one of the largest staking projects in the industry.
Instead of having to cough up 32 ETH, anyone can start staking with any amount.
Unlike other stakers, Lido keeps users liquid by offering them a Staked ETH token.

If you’ve been following Ethereum for the last three years, you’ve also likely heard of Lido Finance.

The massive liquid staking protocol, which launched shortly after Ethereum began its transition to a proof-of-stake blockchain, now commands the lion’s share of the staking market.

Per an oft-cited Dune dashboard from Hildobby, there are more than 27.8 million–or nearly $50 billion–Ethereum staked total across various cryptocurrency exchanges, individual validators, and decentralized protocols like Lido.

Of that sum, more than 31% is staked with Lido Finance, making it far and away the most popular staking solution on the market.

A pie chart with many different colors. — Source: Hildobby, October 2023.

But what is liquid staking, Lido Finance, and how does it all work?

Keep reading to find out.

What is Lido Finance?

Lido Finance goes hand in hand with Ethereum’s full transition to proof-of-stake.

One of Lido DAO’s business development contributors Marin Tvrdić told Decrypt at ETH CC Paris that when Lido launched, it had a perfect market fit.

When Ethereum finally launched its so-called Beacon Chain in December 2020, effectively creating a parallel proof-of-stake network to the proof-of-work version, it also launched the staking feature.

Users with with 32 Ethereum ready to lock into the protocol were quick to start earning those staking rewards too.

But these early stakers enjoyed two advantages. The first, of course, being that they had an idle 32 ETH laying around, which at that time ran folks a cool $18,700.

The second advantage was that they were mad enough to believe that they’d eventually see that money back at some point.

That’s right. When staking first launched, there was no way to withdraw your holdings until developers executed another upgrade called Shanghai in April 2023.

For more about Shanghai and what this was such an important upgrade, read our Learn piece on it. In sum, it lets stakers finally withdraw any of their holdings.

Prior to Shanghai, though, Lido Finance emerged to effectively solve both of these problems prior to Shanghai. It let users with less than 32 Ethereum enjoy the benefits of staking Ethereum and it also helped them stay liquid, hence the term liquid staking.

Before Lido, staking on Ethereum meant you locked up your holdings and that was it, you sat on your hands, raked in the yield.

After Lido launched, though, you could stake your Ethereum with the protocol and then receive something called a liquid staking derivative (LSD), also sometimes called a liquid staking token (LST).

This token, which in Lido’s case is called Staked Ethereum (stETH), held a 1-to-1 price peg with Ethereum.

And as other DeFi projects began to adopt this token as collateral, it meant that stakers could put that stETH back to work elsewhere on Maker to mint more of its decentralized stablecoin DAI or even continue earning extra yield over on lending heavyweight Aave.

How does Lido Finance work?

That’s all fine and good, and has played a huge role in Lido’s ballooning market share of late, but how exactly does staking with Lido Finance work under the hood?

Imagine Lido as simply another layer between users and the Ethereum blockchain. Instead of users needing to maintain the technical overhead of running a validator, Lido takes care of all of this for users.

The protocol vets and onboards node operators that take care of all of this for them.

Per Rated, a node-explorer platform, Lido currently has 36 node operators operating more than 273,000 nodes on Ethereum. The operators are relatively well-known and include brands like BridgeTower, ChainSafe, and Figment.

Becoming an operator means following a rather rigorous onboarding process, which tests a validator’s technical wit, key management practices, and even their location in the world among other requirements. This added friction is essentially meant to ensure that validators on Lido are high quality.

That’s because if they get slashed–a type of monetary penalty–due to validator downtime or attempted malicious behavior from the validators, the protocol and its users could also face some losses. This is also in part why Lido has implemented an insurance fund that takes a slice of protocol fees to protect users from hefty slashing penalties.

And that’s it (in rather broad strokes).

Lido Finance lets everyday users participate in Ethereum’s staking process, no matter how much ETH they hold.