This is the second post in our research series. In this series, we publish data-driven analysis on specific blockchains, dapps, and market segments. Let’s dig in!
Topic: Lido, a non-custodial staking protocol.
Lido is a protocol that allows anyone to earn staking rewards on proof-of-stake blockchains without having to maintain staking infrastructure and lock their liquidity. Since its launch at the end of 2020, the value of assets staked using Lido has grown to over 13 billion USD and Lido has expanded to five blockchains. This short report provides an overview of the protocol, its historical performance, and possible future directions.
Protocol overview
Lido’s main product is liquid staking, which refers to the tokenization of staked assets. The Lido DAO is a decentralized autonomous organization that governs the protocol, has control over the its smart contracts, and controls the funds deposited by users. Originally created for Ethereum 2.0’s Beacon chain, Lido has since expanded to Terra, Solana, Kusama, and Polygon. As it currently stands, Lido offers users annual percentage rates (APR) between 4% and 24% and charges a fee of 10% on all staking rewards.
Liquid staking
In proof-of-stake blockchains, new blocks are verified by users who have staked a significant amount of the blockchain’s native token to become block validators that verify transactions. Validators typically have to lock their tokens for a fixed period of time and receive staking rewards in return. Once the funds are locked they can not be used elsewhere or traded. In liquid staking, the staked funds are tokenized and the tokens representing the locked funds can be freely traded and used across decentralized finance (DeFi) to earn yield.
With Lido, anyone can earn staking rewards by depositing tokens into Lido’s smart contracts that participate in the proof-of-stake validation processes. When depositing assets, users receive Lido’s tokens that can be used to redeem the deposited assets in the future. Lido collaborates with DAO-selected node operators (i.e., block validators) to use the deposited funds to earn staking rewards.
Tokens
There are two kinds of tokens in the Lido protocol: the Lido DAO governance token LDO and tokenized versions of staked cryptocurrencies: stETH on Ethereum, stLUNA on Terra, stSOL on Solana, stKSM on Kusama’s Moonriver parachain, and stMATIC on Polygon.
LDO was launched on the 5th of January in 2021 when 1 billion tokens were minted. 36% of the tokens were unlocked and deposited in the Lido DAO treasury. 64% of the tokens were distributed to the founding members of the Lido DAO. These tokens were locked for one year after which they will be vested over one year. 0.4% of the total supply was distributed to early stakers as an airdrop from the treasury. Owners of LDO can participate in governance with a voting weight proportional to the amount of LDO the voter stakes in the voting contract.
When depositing assets into Lido’s smart contracts, the user receives tokens representing the staked assets (e.g., stETH for depositing ETH) and starts receiving staking rewards. These tokens can be understood as derivatives whose value comes from the underlying staked tokens. The exact process of receiving staking rewards and withdrawal options varies between chains. Staked ETH will remain locked until the last phase of the transition to Ethereum 2.0, which will occur at some point in the future. Withdrawals are supported on other chains. Staked LUNA can be unstaked immediately. The waiting times required for unstaking range between a couple of days and two weeks on Solana, Kusama, and Polygon.
Business case
In the long run, Lido aims to get a portion of the block rewards by becoming a major staking service on Ethereum 2.0 and other proof-of-stake chains. By facilitating participation in block validation, the potential revenue is substantial.
Currently, 2 ETH are minted and rewarded to the miners for every new block in the Ethereum blockchain. During a typical day, this amounts to roughly 11,500 ETH in block rewards over 24h. If Lido can hold on to the 10% market share of Beacon chain staking after the upgrade to Ethereum 2.0, the current fee of 10% of block rewards would result in roughly 10 ETH in daily protocol revenue, taking into account the expected 10-fold drop in block rewards. Lido’s success on Terra has also shown that it is possible for the protocol to multiply its revenue by successfully expanding to other popular blockchains.
Currently, Lido’s main competitors are centralized exchanges that have simple user interfaces, large user bases, and custody of their users’ assets, making it easy for them to stake large amounts of assets. In the future, competition from other DeFi platforms will most likely increase since innovative solutions on open-source platforms are more easily replicated. For example, Benqi on Avalanche and Marinade on Solana already provide liquid staking as a service.
Historical performance
In this section, we will have a look at Lido’s historical performance using Token Terminal’s data. For more information and to interactively explore the shown data, make sure to check out our Lido dashboard.
The figure below shows the total value locked (TVL), i.e., the total value of assets staked with Lido. Note that data for Polygon is missing because Lido launched on Polygon in March 2022. The total value of staked asset exceeded 10 billion USD in less than a year after the launch of the protocol and is currently over 13 billion USD. Nearly all of the value is on Ethereum and Terra.
The figure below shows Lido’s monthly total revenue, i.e., staking rewards, in USD on Ethereum since launch. Note that we do not yet have revenue data from the other chains. After a year of consistent growth, monthly total revenue reached 29 million USD in December 2021 and then fell down to 21 million by February 2022.
However, we know that the price of ETH—alongside most crypto assets—was down during December 2021 and January 2022, so this dip does not necessarily reflect a drop in ETH denominated revenue. Indeed, if we denominate the block rewards in ETH, we can see that the perceived drop in revenue in the beginning of 2022 did not occur.
Total revenue is split between the supply-side participants (i.e., users who have staked their ETH) and the protocol (i.e., the Lido DAO). The protocol fee is 10% of staking rewards, illustrated in the figure below.
Finally, let’s have a look at Lido’s valuation. We measure valuation using fully-diluted market capitalization, i.e., the maximum supply of LDO multiplied by its price. The figure below shows Lido’s fully-diluted market capitalization, which exceeded 6 billion USD in August 2021 and has been on a downward trend since. Overall, the price volatility of LDO has been high with an average price of $2.79 and standard deviation of $1.45 since the launch of the token.
Roadmap
Lido is controlled by the Lido DAO, which means that the future of the protocol depends on the decisions taken by the DAO.
The community is active and proposals are regularly submitted by both established members and external developers and/or companies. An important driver of community engagement has been the Lido Ecosystem Grants Organisation that provides grants to improve Lido and the DeFi ecosystem around it.
Lido is backed by well-known crypto venture capital investors. In May 2021, Lido raised 73 million USD by selling 10% of the total supply of LDO in a funding round led by Paradigm. Other major investors include a16z, Coinbase Ventures, Three Arrows Capital, Alameda Research, and Digital Currency Group.
Conclusion
As an innovator in liquid staking, Lido has grown impressively since its launch and is in a good position to remain as the largest provider of liquid staking in DeFi. Its future success will depend on how competitive it can remain as other platforms start to provide similar services.
Check out previous post on Centrifuge.
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This newsletter is meant for informational purposes only. It is not meant to serve as investment advice. Please consult with your investment, tax, or legal advisor before making any investment decisions.
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