DeFi Deep Dive #6: Lido Finance

A Series Profiling Protocols Featured on DeFi Llama

Over two years since it was first proposed, EIP-1559 will be going live this summer. This ambitious proposal will be upending the entire functionality of Ethereum. The previous system was based on a first-price auction for fee estimation, an economically inefficient auction system that often hits the end user in the form of overpayment.

The EIP-1559 proposal includes several upgrades to address these issues. Transactions will be paid with a base fee plus an incentive fee. The base fee will be burned, while only the incentive fee goes to the miners. As Ethereum transitions fully to proof-of-stake, the expectation is that base fee burn will account for 70% of transaction fees, enough to overcome inflation, turning Ethereum into a deflationary currency.

EIP-1559 in July marks the first major milestone on the gradual transition to a fully proof-of-stake ETH. One of the trickiest elements across the several year transition is to ensure that Ethereum migrates from protocol version 1.0 to 2.0. The transition requires locking Ethereum 1.0 into a staking address. Locked Ethereum may not be withdrawable for several years but does offer staking rewards. That said, the risk for traders is that DeFi in Ethereum 1.0 may provide better returns than staking for Ethereum 2.0. Who would want to risk missing out?

Within this context we introduce Lido Finance, a critical player in this transition.

To incentivize users to stake, Lido Finance created stETH, a token representing staked Ethereum. The stETH token is completely liquid and can be transacted just like Ethereum. Meanwhile the staking rewards also accrue to users, minus a 10% cut for Lido.

It’s proven very popular. Already over 400,000 ETH have been staked with Lido.

One reason for this popularity is that it allows access to Ethereum 2.0 staking without any minimums. The minimum staking amount is 32 ETH, costing over $65,000 even after the recent market tumbles. Lido requires no minimums, so even small players can participate in Ethereum’s future.

Nonetheless, Lido is most popular among large stakers. The average staking deposit among Lido Finance stakers is 76 ETH, heavily skewed by large transactions like one 22,588 ETH deposit.

Among a fragmented field of staking solutions, Lido has jumped to the top of the pack. Lido is the 3rd largest ETH depositor address behind only exchanges like Kraken and Binance.

As for liquidity across the Ethereum 1.0 landscape, Lido benefits from the existence of the popular Curve stETH pool. This is by far the deepest AMM pool in DeFi, at peak valued over $2.5B. The existence of such a large pool has allowed stETH to maintain its ETH peg while keeping the asset highly fungible.

Lido is also moving everywhere across DeFi. They recently announced or completed proposals to integrate with Solana, Aave, Enzyme, Terra and Bancor. By the time Ethereum 2.0 arrives, stETH may already exist on every potential sidechain.

The protocol’s Lido token (LDO) is primarily useful for governance on the Lido DAO. Before the market turmoil, the LDO token enjoyed quite a nice run-up to a peak value above $5 amidst news of Lido’s $73 million dollar investment led by Paradigm.

If you are interested in learning more about Lido, take a look at their website, Telegram, Discord, Twitter, or Github.

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