What is Lido Finance? A beginners guide.
This is a comprehensive beginners guide to the liquid staking Protocol Lido ($LDO).
One of the most impressive DeFi products that we’ve seen is Lido. It’s a protocol that has been growing rapidly without much media coverage. However, to first understand what makes Lido so impressive, we need to understand what staking is. Staking is a crypto economic primitive where users lock up capital and take on some risk in doing so and get a token reward in return. By staking their coins the user is essentially helping in securing the network and also showing the alignment of their value with that of the protocol as they are willing to lock in their capital for certain amount of time.
The launch of Ethereum basically gave birth to the DeFi space with staking being a major component and with ethereum being the most popular DeFi token there was no doubt that there was high demand for staking it. Unfortunately, staking on Ethereum had a few pain points which were noticed by the core team at Lido. Staking on Ethereum was incredibly non-user friendly as you could only stake in multiple of 32ETH, before ETH2 when you would stake your ETH your coins would be transferred to the ETH2 chain and could only be unlocked once it went live which presented a huge commitment, and retail was completely priced out of staking. Noticing the obvious demand for ETH staking in combination with the issues of staking directly on the Ethereum network, many centralized exchanges jumped at this opportunity and started ETH staking on their own. Exchanges like Kraken, coinbase, and Binance captured majority of the staking market but ofcourse they aren’t decentralized.
This is where Lido steps in with their unique idea of liquid staking (Fun fact: the name Lido comes from its utility. Liquid Staking DAO -> Liquid DAO -> Lido). Liquid staking is basically a way to tokenize your staked position, in the case of Lido you stake your ETH in their smart contract in return for an ERC-20 token that represents your position name stETH (Staked ETH). You can then use this stETH to interact with all the different DeFi applications such as lending, trading, borrowing, exchanging or whatever you please. You can lock up your capital but still ensure that the locked capital is productive in other ways which according to me is simply brilliant. It allows you stake ETH in much smaller quantities as it creates a sort of two-way door for Staking ETH.
Lido as a protocol itself also has a lot going for it. To begin with, it’s the only on-chain staking service that gives a product which is as good if not superior to the staking services provided by exchanges. The stETH token can basically become the base currency of the Ethereum network, this is because it can do everything ETH does and more. You can use stETH for all of your DeFi activity while still earning risk-free yield on the ETH that you staked earlier. Moreover, liquid staking as a sector doesn’t have much in terms of differentiating. If a new protocol wants to come and capture some of Lido’s market share, there isn’t much different that they can do because liquid staking is simply tokenizing your staked position. Hence, they are positioned really well because the lack of differentiation creates a winner-takes-all type of scenario and since most of the users have already been captured by Lido with no real competitor in sight, its only likely that the project will continue to see further exponential growth. Also, it’s simply a better product than traditional staking, being able to unlock your capital and make it productive while earning yield is a product that is very tough to beat.
Now we know how good Lido is as a protocol but let’s look at a statistic of its usage and growth. In the first 6 months of Lido being live they reached 500,000 ETH staked in the protocol by the 15th of June 2021. Just two months later, on the 25th of august 2021 they reached the milestone of 1,000,000 ETH staked. This growth rate is nothing short of exponential and is only continuing this upward trend.
If you want exposure to Lido as an investment, then you may consider investing in their native token $LDO which is primarily a governance token and users who own and stake the most LDO have governing power that represents their position. You must also bear in mind that this is still early days for Lido. Recently, they announce that they will be offering their services on Solana with stSOL and the Terra Blockchain with stLUNA. Therefore, $LDO will basically give you exposure to the majority of on-chain staking demand across various blockchains and given how imperative staking is in the blockchain space, it is very likely that the ascend of Lido has only begun.
Thank You for reading, and please Do you own research, do not consider this financial advice. I am simply informing you about a protocol that I believe has massive potential.
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