Footprint | What makes Lido a top-tier ETH staking protocol?

What makes Lido a top ETH staking protocol? Why can staking ETH in the Lido protocol earn an annualized yield of 12% to 14%?

Feb. 2022, Vincy
Data Source: Footprint Analytics – Lido Dashboard

Lido is a platform built on the Ethereum 2.0 Beacon Chain, allowing users to stake ETH without locking it up and earning staking rewards, while also receiving stETH tokens 1:1 to participate in other DeFi market services.

Advertisement - Continue scrolling for more content

Within just 3 months, Lido hit a record high TVL of $139.8 billion, surpassing AAVE and Convex Finance protocols, ranking third among DeFi projects.

Let's analyze whether Lido, with its rapidly growing TVL, is a platform worth using.

Lido Supports Multiple Mainstream Public Chains with Innovative Tokenomics

Lido's business involves providing staking pool services for Proof of Stake (POS) public chains. Currently, it supports Ethereum 2.0, Terra, Solana, and Kusama. According to Footprint Analytics, as of March 1st, Lido's Total Value Locked (TVL) reached a record high of $13.98 billion, with Terra (56%) having the largest share, followed by Ethereum (41%), and the other public chains having a much smaller share.

Lido integrates many top protocols by supporting these 4 public chains and issues corresponding public chain token derivatives to provide liquidity for asset holders. Users can stake cryptocurrencies like ETH, SOL, LUNA, and KSM to receive equivalent tokens like stETH, stSOL, stLUNA, and stKSM, and earn annualized returns ranging from 4.5% to 18%.

Lido also issues its native token LDO, which was priced at $2.08 as of March 1st, lower than the prices of the aforementioned 4 tokens. LDO is mainly used for voting and governance, and has not been listed on major decentralized exchanges. The overall price trend of LDO does not directly correlate with Lido's TVL.

This sets Lido apart from protocols like MakerDAO and Liquity. For example, when staking ETH with MakerDAO, the reward is DAI, while staking ETH, SOL, and Luna with Lido results in receiving derivative tokens of equal value and earning substantial annualized returns, unaffected by the price of the native token LDO. This makes Lido a good interest-bearing staking service protocol.

Various Investment Options with Lido

For users who wish to independently participate in Ethereum 2.0 staking, staking 32 multiples of ETH can be challenging for retail users. Lido offers a more user-friendly staking amount, allowing users to stake any amount of ETH to participate in Ethereum 2.0.

As of March 1st, the total staked ETH was 1.98 million. Analyzing how to earn more returns on the Lido platform by staking ETH:

• Stake any amount of ETH and receive a 1:1 stETH token, earning a 4.5% APY. Compared to AAVE, where depositing ETH yields a 0.2% APR, the returns are negligible.
• Convert interest-bearing stETH assets into liquidity and participate in other DeFi protocols (such as Curve, AAVE, and Convex Finance) to earn higher returns. The process includes:

1. Placing stETH into Curve to earn approximately 3% APY

2. The returns from Curve can then be further deposited into Convex Finance to earn additional returns. By depositing stETH into the steth pool on Convex Finance after obtaining LP on Curve, users can earn approximately 5.1% APR.

In conclusion, by staking any amount of ETH on the Lido platform and using it on other DeFi platforms, users can earn an APR of 12% to 14%, providing significant returns. Curve and Convex Finance are among the top 5 protocols in the ecosystem, offering controlled risks and no liquidation risks, following a single-token staking model.

Considerations on the Advantages and Disadvantages of Lido

Advantages of Lido:

• User-friendly and flexible
• Can stake to external contracts for higher APY
• Single-token staking model

Disadvantages of Lido:

• Punishment mechanism: Lido is built on a new Proof of Stake blockchain called Ethereum 2.0 Beacon Chain, where user-staked tokens exist. It has a reward and punishment mechanism where the token supply can increase or decrease algorithmically based on staking rewards on the Beacon Chain during a Rebase event triggered by oracle-reported statistics.

• Unstable returns: The stETH balance is updated daily at 24:00 UTC. If the stETH balance increases, a reward is earned, but if it decreases, a certain amount of stETH tokens are lost. However, the annualized returns from staking on Lido are 4.5% (when staking ETH), which are calculated separately from the rewards and penalties on the Beacon Chain.

• Gas fees are a cost consideration for small users

This article is contributed by Footprint Analytics community

The content presented is purely personal opinion, for reference and discussion purposes only, and does not constitute investment advice. If there are any obvious errors in understanding or data, feedback is welcome.

Copyright Disclaimer:
This work is original by the author. Reproduction requires proper attribution. For commercial use, contact the author for authorization. Unauthorized commercial reproduction, excerpting, or other use will be subject to legal liability.

Footprint Community is a global collaborative data community, where members use visualized data to create insightful narratives. In the Footprint community, you can find help, establish connections, and engage in blockchain-related learning and research on Web 3, the Metaverse, GameFi, and DeFi. Many active, diverse, and highly engaged members motivate and support each other in the community, creating a worldwide user base to contribute data, share insights, and drive community development.