Lido DAO LDO
What is Lido DAO? LDO Explained
Inside the Lido DAO network
Lido DAO is a decentralised autonomous organisation (DAO) that provides a liquid staking solution on the Ethereum 2.0 blockchain and other platforms based on the Proof-of-Stake (PoS) consensus mechanism such as Solana, Polkadot and Polygon.
DAO is a new type of organisation based on the use of blockchain technology. If you are new to the crypto space, we suggest reading this article: 'What's a DAO?'.
The Lido liquid staking protocol arose just before Ethereum's contentious ‘Merge’ as a solution to staking requirements. The Lido protocol enabled users to access their locked value of staked tokens. Alongside other liquid staking protocols, Lido was expected to rectify Ethereum's other issues.
Furthermore, it allows users to keep the liquidity of staked tokens through the use of a stand-in stToken that can also be utilised to earn yield through decentralised finance (DeFi) markets.
This decentralised project is governed by an independent Lido DAO community using the platform’s native LDO token. The main objective of this crypto project is to simplify staking while remaining decentralised and accessible to a wide user base.
As stated by the team behind the Lido DAO platform, Lido aims to empower users to stake their assets and use them accordingly, supporting various crypto assets.
History of Lido DAO
The launch of the Lido liquid staking platform happened in December 2020, following the Ethereum 2.0 Beacon Chain going live. The project was co-founded by Jordan Fish, also known as CryptoCobain, and Kasper Rasmussen.
Behind the Lido DAO project are numerous organisations and individuals well-known for their work in the crypto industry and the DeFi space. For example, memberships include P2P Capital Libertus Capital, Bitscale Capital, along with a number of individual angel investors.
Even though Lido’s focus has been mainly on Ethereum, it expanded rapidly to other platforms. In March 2021, it launched staking on Terra, and only a few months later, Lido launched staking on Solana.
This year has been a successful one for Lido DAO. On 5 May 2023, $135 million worth of LDO tokens were transferred from one self-custody crypto wallet to another.
Explaining the Lido DAO governance system
The operation, future upgrades, and main objectives are facilitated by a decentralised autonomous organisation (DAO). In other words, the Lido community manages a set of liquid staking protocols by making decisions regarding essential parameters of the liquid staking solution such as protocol upgrades, assigning node operators, and staking rewards.
Decentralised governance has turned out to be successful in the past. If you are interested in gaining more insight, why not read this article: 'UkraineDAO: How a DAO is funding the Ukraine defence'.
A few committees are in charge of managing specific parts of the DAO, such as the node committee (LNOSG), the finance committee (RCC), the reward committee (reWARDS), and a special committee that governs funding known as the Lido Ecosystem Grants Organization (LEGO).
Governance rights are distributed across the Lido DAO network by the use of the platform’s native cryptocurrency – the Lido DAO token (LDO). Token holders are enabled to vote and therefore, participate in the decision-making procedure of the protocol.
Governance is based on a so-called token-weighted voting structure – having more tokens translates to a bigger voting power.
Aside from voting on-chain, the entire governance process includes several steps. If there is a potential proposal to be voted on, it has to be primarily posted on the Lido DAO Research Forum. Thereby, the whole community is enabled to check out the proposal and provide feedback.
The community has approximately one week to decide whether they should go further with the proposal or idea. If the answer is positive, the proposal moves to Snapshot Voting.
Before voting for a proposal on-chain, the community needs to engage in Snapshot Voting. In simple terms, the community needs to demonstrate a substantial degree of support for the potential proposal.
Finally, the final stage refers to on-chain voting on AragonOS. A framework supported by Aragon is used by LidoDAO to execute voting, along with updating smart contracts and funding transfers.
What is liquid staking?
If you are a frequent reader, you already know that staking refers to the process of locking users’ crypto assets for a determined period in exchange for yields. The liquid staking solution of the Lido network fixes the main downside of locking tokens.
Users get a tokenized version of their funds on a 1:1 basis. Aside from the yield users earn from staking, additional income can be earned by using stTokens on other DeFi protocols as well.
The Lido solution simplifies staking. By receiving stTokens in return, users can swap, trade and transfer them at any time. Liquid staking services through the Lido protocol enable users to earn block rewards from staking assets while addressing significant issues such as illiquidity and complexity.
Additionally, Lido encompasses a rapid exit for unstaking. Generally, unstaking requires a waiting period that might be uncertain which is not a good thing in times of market fluctuations. Stakers within the Lido platform are enabled to swap their stTokens to any other digital assets.
Controversies surrounding Lido DAO
Even though Lido DAO has been a successful project so far, it has had its share of controversies. The project based on decentralisation has been called out by a part of the crypto community for bringing particular risks to the decentralised table.
In 2022, the Lido DAO community voted against a proposal to sell 10 million LDO tokens for $14.5 million to venture capital company Dragonfly Capital.
Is Lido DAO a centralisation risk?
Lido DAO believes to have helped Ethereum in its transition from Proof-of-Work to Proof-of-Stake. However, as it grew in popularity, concerns about potential centralisation threats appeared.
Simply put, the liquid staking solution Lido Finance currently accounts for about a third of all staked Ethereum (ETH). This significant portion of the stake worries a part of the crypto community, who view it as an attack on Ethereum’s decentralisation.
On the other hand, Bitcoin’s situation provides a comparable situation, where a handful of mining companies hold a huge portion of the hash power securing Bitcoin’s Proof-of-Work network. In theory, this makes it possible for them to collude and conduct a 51% attack with ease.
Were this scenario to take place, however, these colluders would be viewed as bad actors, and the remaining good actors would be expected to quickly recognise this attack and reorganise within a few blocks. It can be presumed that a similar reorganisation effort could take place on Ethereum were it to face such a takeover.
Nevertheless, as the Lido protocol grows in size, it could still wield more influence over Ethereum, adding to the centralisation concern. It has also been stated that, without substantial controls, DeFi projects could be destroyed by liquid staking solutions.
The Lido DAO / SushiSwap faceoff
The problem between Lido DAO and SushiSwap became public when SushiSwap began its efforts to recover funds it lost in a $3.3 million hack. In April 2023, the majority of stolen funds, specifically 40 ETH, were transferred to a Lido vault contract that was distributed automatically to node operators and stakers.
Lido DAO put forth a governance proposal at the beginning of May 2023 to vote on whether to return the 40 ETH to SushiSwap. While most token holders voted in favour of returning the funds, there were only 44 million votes; 50 million votes are needed to reach quorum.
Lido DAO went on with a second governance proposal on the same issue, but it didn’t fetch enough votes to reach quorum.
After the first vote failed, SushiSwap’s Head Chef Jared Grey stated that Lido’s actions were theft. Grey continued by accusing a pseudonymous DeFi user Hasu, who is also Lido’s advisor, of obfuscating the procedure of returning funds.
Regarding these allegations, a Lido contributor stated that SushiSwap made a mistake as it didn’t audit the smart contracts properly.
Lido DAO hacking allegations
In September 2023, SlowMist, a well-known blockchain security company raised concerns regarding a potential security breach within Lido token smart contracts. Allegedly, the token contract did not follow the ERC20 token standard meaning that it didn’t encompass the option to bounce a transaction in case of insufficient funds by the sender.
The security firm stated that a malicious actor could potentially transfer more LDO tokens to an exchange than they really have and that the crypto exchange might not detect the error. This could potentially lead to a more dangerous situation since malicious users could withdraw other tokens from the exchange due to using an inaccurate balance.
Lido DAO didn’t admit to any exploits but responded promptly to these security allegations. The team behind the protocol stated that they are fully committed to the security of users’ funds. Additionally, they acknowledged the existence of such a security vulnerability and assured users that they would fix it immediately.
How does the Lido DAO protocol work?
Liquid staking platforms like Lido attract new users to participate in securing PoS networks by enabling them to stake any amount of PoS assets in exchange for block rewards. Lido is progressive in this area when compared to traditional staking since it manages to efficiently lower barriers to entry and costs associated with locking assets within the protocol.
When users stake tokens on the Lido DAO platform, they get into a staking pool smart contract that stakes the tokens on the relevant PoS blockchain. A staking pool smart contract encompasses a number of functions such as managing deposits and withdrawals, delegating pooled funds to node operators, minting and burning tokens and others.
Users receive a digital version of their funds via stAsset tokens that can be used to bring rewards from the original protocol as well as from other protocols and applications within the DeFi space. This provides an additional revenue stream for users.
For example, users who are interested in being staking validators can become that by depositing 32 ETH – the minimum requirement to stake on the network. Lido DAO simplified staking on Ethereum.
When users stake on Ethereum, they receive stETHa tokens. These tokens are ERC-20 compatible and can be minted as soon as users deposit funds into the staking pool smart contract. They are burned when users decide to make a withdrawal.
When deposits are staked, they are further distributed to node operators and deposited to the Ethereum Beacon Chain for validation. Deposited ETH is divided into sets of 32 ETH among node operators on the Lido DAO platform. Validators use a public validation key to approve transactions regarding staked assets.
Lido DAO's mechanism enables the distribution of staked assets across multiple validators, efficiently eliminating all risks associated with single validator staking, along with making staking more accessible to a wider user base.
Explaining stTokens
As explained above, Lido DAO enables so-called double-dipped yields. In other words, it provides the ability for users to earn staking rewards without locking away their digital assets which are possible due to stTokens.
These tokens are not ordinary tokens; they present staked assets and act as a liquid proxy for the underlying crypto asset. We have already explained that stETH refers to a liquid stand-in for ETH. Other stTokens are, for example, stSOL tokens which refers to staked SOL or bLUNA that equals staked Luna tokens.
Such tokens are custom-built for the DeFi ecosystem to provide a greater degree of interoperability, liquidity, and the functioning of the reward system.
What is the Lido DAO token (LDO)?
LDO is the governance token of Lido’s DAO, the decentralised body which carries out the governance decisions of the Lido community. Lido's native token supports divergent functions in the network such as providing a governance mechanism for users and an incentive to validate transactions.
The LDO token is the governance token of Lido DAO. It is an ERC-20 token which gives its holders governance rights such as the power to vote on proposals, upgrades and other parameters regarding the Lido DAO platform.
The more LDO tokens a user has locked in its voting contract, the greater the voting power the user gets.
LDO metrics - total supply, circulating supply, market capitalisation, price and token allocation
The total circulating supply of LDO tokens amounts to approximately 841 million out of the total supply of 1 billion LDO. At the time of writing, the market cap equals $1,370,492,578, and the price of LDO is $1.54.
As for the token allocation, the majority of LDO tokens were allocated to the Lido DAO treasury. The rest was allocated to investors, initial Lido developers, founders, validators and signature holders.
How to buy LDO tokens?
LDO tokens can be purchased on a wide variety of crypto exchanges. Purchasing LDO tokens on major exchanges can be as straightforward as searching LDO to reveal available trading pairs. Even though it has been listed on many exchanges, it cannot be directly purchased with fiat money.
Therefore, you can first register on a fiat-to-crypto exchange and buy a well-known cryptocurrency such as Bitcoin. After you finish with registration and Know-Your-Customer (KYC) checks and buy Bitcoin, you can now transfer your cryptocurrency to an exchange where LDO can be traded.
Is LDO a good investment?
It is not possible to give any investment advice, especially when it comes to the crypto market. Keep in mind to always DYOR (Do-Your-Own-Research) before investing in any cryptocurrency. We are just going to analyse a bit the market performance of Lido DAO (LDO) to provide more insight.
Before the Ethereum Merge, LDO became popular within the crypto community. In the 2022 bear market, LDO managed to go on two rallies with the price going up more than 300%. Just a month before the Merge the rally stopped, and the price went up again in the beginning of 2023.
The reason behind the rally stopping right before the Merge took part has been explained as a sell-the-news event. It refers to a well-known saying among investors and describes a phenomenon where investors buy an asset that is tied to rumours about important news and sell it as soon as the rumoured event approaches.
The same happened ahead of Ethereum's Shanghai upgrade as liquid staking platforms were deemed as beneficiaries of the upgrade. For example, Lido Finance's total value locked (TVL) managed to pass that of Maker DAO at that time. However, despite the positive 2023 market sentiment, crypto assets remain below the highs achieved in 2021 and 2022.
Additionally, the market of liquid stake protocols is becoming competitive. Despite Lido DAO holding a big share of the market, a few protocols emerged as serious competitors.
As you can see, making any investment-related decision requires an understanding of market conditions, fluctuations of the crypto market, and how momentum from events may trigger price activity.