As of early 2023, Lido Staking is the largest DeFi protocol measured by Total Value Locked (TVL), which has overtaken the long-running incumbent MakerDAO.
Lido staking is an Ethereum derivative that issues users/participants a synthetic ETH token, stETH (commonly referred to as “staked ETH” or “staked Ethereum”) in exchange for deposited ETH tokens, which Lido stakes against Validator nodes in the Ethereum network. The main value proposition is that users are able to gain interest on their deposited ETH via a proportion of the (Proof of Stake) block creation rewards allocated to validators, while also holding a liquid token, stETH, which can be traded on the market. This can be thought of as allowing users to have their ETH and stake it (have one’s cake and eat it
Lido staking originally operated on the Beacon chain prior to Ethereum’s long-anticipated full transition from Proof of Work to a Proof of Stake consensus mechanism.
stETH gained new importance and relevance once it occurred to the market, broadly, that ETH staked towards consensus generation in the post-merge Ethereum contracts is unreleasable until after a future upgrade; it is yet to be determined when exactly this upgrade will be announced.
On May 12, a decisive on-chain vote will be held by the Lido development team to determine the approval of the Lido V2 upgrade. Initially presented in February, the Lido V2 upgrade promises to facilitate stETH to ETH conversions and introduces the early stages of a new staking router architecture that enables permissionless staking. Subsequent to its announcement, Lido developers have extensively tested the upgrade on Ethereum's public testnets and conducted numerous third-party code audits. The final voting process, set to occur over the weekend, will take place through the Aragon DAO platform. In order for the proposal to pass, more than half of the LDO governance tokens participating in the vote need to endorse the upgrade, with a minimum of 5% of the total LDO governance token supply giving a positive signal. The voting period will span three days, wrapping up on Monday, May 15. If the proposal garners enough support, the Lido V2 upgrade will be activated on the same day.
As the largest staking pool on Ethereum, Lido holds over 30% of the total ETH staked. Since the Shanghai upgrade was deployed last month, the volume of ETH staked via Lido has increased by 9%. Meanwhile, Rocketpool, a rival staking pool that enabled staked ETH withdrawals a few days post-Shanghai, saw its staked ETH volume grow by an impressive 23% within the past month.
The appetite for staking in the Ethereum ecosystem has surged significantly post-Shanghai. As of May 7, the volume of newly staked ETH since April 12 has exceeded the amount of ETH being withdrawn, signaling that Shanghai has been perceived as a risk mitigation event for staking activity by Ethereum stakeholders. As of May 11, there are more than 40,000 validators in the queue for activation, with zero validators intending to exit.
However, as Lido has yet to enable staked ETH withdrawals, it has been somewhat disadvantaged in comparison to both its decentralized and centralized competitors, such as Rocketpool, Frax Finance, and Binance. While these competitors have seen double-digit growth in staked ETH volumes over the past month, Lido's growth rate has been more modest at 9%.
Despite this, Lido remains the leading staking platform on Ethereum. With the probable activation of staked ETH withdrawals on May 15, Lido will be able to process stETH to ETH redemptions at an even quicker rate than direct ETH withdrawals through the Ethereum protocol itself. Given the patterns of deposit and withdrawal activity since Shanghai, the activation of staked ETH withdrawals on Lido is likely to be viewed as a risk reduction event, which will likely incentivize further staking activity via Lido. Additionally, the secondary feature of Lido V2 – the introduction of a new staking router architecture – is anticipated to bolster Lido's competitive position by laying the groundwork for permissionless staking.
In light of the continued regulatory scrutiny of decentralized finance and staking protocols, both in the US and globally, it is essential for Lido to continue advancing toward higher levels of decentralization and immutability to ensure its long-term viability and resilience. The less Lido relies on on-chain governance and off-chain interference, the more secure it becomes, protecting the sizable stake under its management from regulatory capture.
