What Is Lido Finance | CoinStats Blog

Decentralized finance (DeFi), protocols have been created in many ways to reduce financial boundaries and increase opportunities for retail customers like you.

Lido financing is an example of such a protocol. This protocol aims at removing the significant financial barriers that exist for Ethereum staking. Become a validator by 32 Ethereum and it makes it more technically difficult to run a validator.

What is Lido Finance? How can you make passive income with it? What is the secret to DeFi’s 30% share of all staked Ethereum on Beacon Chain? Learn more about Lido Finance.

What’s Lido Finance and How Does It Work?

Lido Finance, in a simple description, is a liquid-staking protocol that allows users to secure proof-of-stake-based cryptocurrency like Ethereum or Solana without locking them up. This allows tokens or rather their Lido-issued counterpart to be freely traded and staked according to protocol.

One of Lido’s biggest advantages is that it lowers the entry barriers for ETH staking, as running a validator node on Ethereum requires a minimum stake of 32 ETH, worth just over $54,000 at current price levels. Lido makes it possible for users to hold fractions of Ether tokens, and without needing to create their own validator node.

Liquid staking refers to the ability of the equivalent in staked cryptocurrency to be traded freely on the open markets. How does it work exactly?

Lido customers who place their ETH in Lido’s account will be able to receive the equivalent amount of Lido Staked Ether, which is equal to the price of Ethereum (more below). They can also be traded freely and moved among DeFi protocols to increase capital efficiency.

Lido Finance currently supports Ethereum’s Beacon Chain (also known as Ethereum 2.0), Solana, Polkadot, Kusama, and Polygon.

The cryptocurrency that you stake rewards depends on. There is a starting rate of 3.8% for liquid Ethereum and 16.5% for liquid Polkadot.

How Does Lido Finance Work?

When a user stakes ETH on Lido, a set of smart contract algorithms distributes the tokens among 22 validators on Ethereum’s Beacon Chain. The Lido DAO has previously verified all validators on the Beacon Chain. Validators receive 5% in staking rewards for sharing node capacity.

Another 5% of the staking rewards go to the Lido DAO’s treasury, which will be used for research & development, protocol insurance, and the Lido Ecosystem Grants Organization (LEGO). Token holders that stake their tokens to the protocol receive 90% of the remaining rewards.

Lido, as previously stated, offers a trading token that is similar to receiving a receipt for any staked tokens. For instance, if users stake 1 ETH to the protocol, they will receive 1 stETH token in return — which is pegged to the price of ETH and is freely tradeable.

However, how can stETH ensure its price stability? There are basically three price stabilization mechanisms.

Crypto traders will buy stETH if it falls below its price peg and sell it for Ethereum tokens, while also making profit from the difference in price. Day traders can benefit from this organic financial incentive.

The second mechanism that stabilizes the price of tokens such as stETH is liquidity mining. Investors are encouraged to put both their assets in the liquidity pool, as Curve Finance and Lido DAO offer incentives for liquidity.

Organic demand, the third main mechanism for maintaining stETH’s peg, is also important. As stETH can be freely traded while earning staking rewards, it makes the token a great fit for lending protocols like Aave — enabling them to earn staking rewards and interest from borrowers simultaneously.

CoinStats Earn – How to Get Lido Finance

Lido stakes are very simple and can be done via CoinStats Earn in just a few clicks. Here’s how it works, using Ether as an example:

  1. Go to the CoinStats website and click the “Open” button. Make a PageYou can click on the nine dots in the top menu.
CoinStats homepage
Earn now
  1. Once you’re on the Earn page, click on the orange “Start Earning” button.
Start Earning
Click on the “Start Earning” button
  1. To start stake with Lido Finance, click on Lido Staked Ether.
Lido Staked Ether
Click on “Lido Staked Ether”
  1. Once you’ve opened up the Lido Staked Ether dashboard, you’ll be prompted to connect your wallet. To do this, click on the orange Connect button.
Connect button
Click on the “Connect” button
  1. After connecting your crypto wallet, select the coin you wish to stake under the “Deposit” tab and adjust the number of tokens you wish to stake.
  1. After reviewing your settings, click on the “Deposit” button below.
  1. This will prompt a transaction in your wallet, which you’ll have to approve to finalize the staking.
  1. Once the transaction is completed, you’ll receive the equivalent of your staked ETH in stETH, directly in your crypto wallet.

How safe is Lido Finance staking?

Although Lido can be staked with relative safety, there are still risks associated with all DeFi protocols. These are the biggest risks when using Lido.

  1. Smart contract exploits

Smart contracts, which were introduced only in 2015, are still a relatively young technology. ChainSecurity has audited Lido, but there are still vulnerabilities in the code and other risks.

  1. DAO Risks and Key Management

One-signature multisignature wallets control validation withdrawals to Lido. The private keys of 6 wallets could be lost or stolen and hackers could authorize withdrawals for the Lido DAO. This could also occur in case of the wallet keys being mismanaged, as we’ve seen in the unfortunate event of the $625 million Ronin hack.

  1. Validator risks

Validators of Ethereum risk getting penalized if they lose their nodes. This can lead to them losing up to 100% on their staked ETH. This is commonly referred to as “slashing” — which is also a risk if you stake with Lido.

It’s worth noting that slashing is a minimal risk, as Lido spreads your tokens among multiple reputable validator nodes and mitigates losses incurred through slashing with a dedicated insurance fund.

  1. stETH price de-pegging

Despite the existence of three price-mirroring systems, stETH may theoretically loose its peg due only to Lido’s limited withdrawals. At the time this article was written, stETH trades 0.2% less than ETH. However, the Lido AO actively takes measures to keep the price peg.

  1. Risks of an ETH-stETH “death spiral”

A “death spiral” refers to the events that led to Terra/Luna losing its peg as the price stabilization algorithms failed due to extreme sell pressure. stETH does not have an algorithmic stability, but its value depends entirely on ETH and the staking incentive on the network. Staking rewards and Ether prices could crash, which would cause extreme price instability for stETH.

On the bright side, stETH can’t completely lose its value, as it is backed 1:1 by actual ETH held in staking pools.

The Lido Token DAO (LDO).

In January 2021 the Lido Dot-AO token (LDO), was released. This came one month after Ethereum Beacon Chain, which launched at the close of 2020.  LDO is a governance token that allows Lido DAO holders to make proposals or cast votes for existing ones.

Lido DAO Token

Technically, LDO refers to an Ethereum-native ERC-20 token. There is an initial supply of 620million tokens and a maximum of one billion. These tokens are minted from the Genesis block. According to the introductory blog post, the LDO token’s  initial allocation was the following:

  • DAO treasury – 36.32%
  • Investors – 22.18%
  • Validators and signature holders – 6.5%
  • Initial Lido developers – 20%
  • Founders and future employees – 15%

There is no set release schedule or issuance rate for tokens locked in the Lido DAO’s treasury. Token holders of LDO must vote on all treasury emissions and accept them.

LDO, currently trading at $1.95 per coin, is the 50th most popular cryptocurrency in terms of market capitalization. According to CoinStats, its market cap stands at $1.2 billion.

Lido finance: The team and funding behind it

Lido Finance, founded by Konstantin Lomashuk and Vasiliy Chapovalov (also founders of P2P Validator), was created in 2020. CobieOn Crypto Twitter), the person who has since quit Lido, 2021.

In May 2021, Lido raised $73 million in a funding round led by crypto venture capital firm Paradigm, which bought $51 million worth of LDO tokens from the Lido DAO’s treasury. Coinbase Ventures and Three Arrows Capital were among the notable participants in this round. Jump Trading, Alameda Research and Jump Trading also contributed $22 million.

Venture capital firm Andreessen Horowitz, a16z, invested $70 Million in Lido Finance. They also taped the protocol to stake an undisclosed portion of their ETH holdings on the Beacon Chain.

The Lido DAO

The Lido DAO is a Decentralized Autonomous Organization that manages Lido’s liquid staking protocol. The voting power granted to LDO Governance token holders allows them to set fees, assign node operators and decide other parameters.

According to Lido’s technical docs, the DAO is also responsible for accumulating service fees and investing them in research & development, liquidity mining incentives, protocol upgrades, bug bounty incentives, and the general operation of the protocol.

Lido DAO members Semantic VC is ParaFi Capital and Libertus Capital. Bitscale Capital and StakeFish are StakingFacilities. Chorus, P2P Capital and KR1.


All Lido DAO governance and network decisions are governed by the LDO token and its holders — to ensure the stability and decentralized governance structure of Lido Finance.

The Lido governance forum votes on protocol proposals. LDO stakes in voting contracts determine the user’s voting weight. Meaning that the more LDO a user locks in the voting contract, the greater the user’s decision-making power.



As per Lido’s official blog post, the purpose of the Lido DAO treasury fund includes the following:

  • Fund for insurance
  • Development grants / Gitcoin grants
  • Compensation and Salaries
  • Requests for legal assistance
  • With other protocols, you can also conduct research
  • Marketing/social media campaigns
  • Protocol fees
  • Events involving liquidity mining

The majority of LDO holders must vote on any treasury allocations and accept them. The Lido DAO Treasury wallet currently holds approximately 139 million LDO tokens at the current rate of $271 million.


Lido decentralization roadmap

Lido Finance’s main mission is to make liquid ETH staking completely trustless. This was described in their July 2021 blog post. There are no central custodians required or any other entities involved in the deposit, staking and unstaking of ETH tokens.

Lido also has a roadmap dedicated to decentralization that aims at making the protocol completely trustless. Currently, Lido’s validator node selection process is centralized, as nodes have to apply and be vetted by the Lido DAO.

To achieve a permissionless validation process, Lido is gradually adopting Distributed Validator Technology (DVT), which will allow the protocol to onboard untrusted node operators, by pairing them with a majority of trusted nodes — hence enabling new nodes to decentralize the node setup, without the risks of slashing, as they would propose and attest blocks together with the trusted nodes.

Lido is primarily focused on the implementation of Distributed Validator Technologies (DVT)

Second, a Node Operator Score is created based on the performance of nodes and can then be used to adjust stake allocation. Anyone can become a trusted node and gain a reputation. It would replace the existing binary system that allows for trusted and untrusted operators to become nodes.

Lido Finance is also attempting to decentralize the Ethereum network. It makes it easy for anyone to start a validator network, allows more validators to join the network, and offers more rewarding staking for validator networks.

Lido: Concerns

The primary concern around Lido Finance is the protocol’s large ETH stake, as Lido currently makes up 30.3% of the total Ether staked on the Beacon Chain.

Despite aiming to make Ethereum more decentralized, Lido’s current growth rate could make it the main protocol for Ethereum validators. If Lido’s ETH stake would eventually rise to 100%, the Lido DAO could have a significant influence on the Ethereum network — especially as industry participants speculate that the protocol could soon control over 50% of staked Ether.

Lido’s growing stake is a significant worry since whoever controls the majority of the block production on a public blockchain can also re-order or censor transactions, which was also noted in Lido’s report on DAO vulnerabilities.

The second major concern around Lido is that it’s not truly trustless. Lido cannot be considered a completely trustless protocol due to two major issues. First, validator withdrawals can only be controlled by 11 multisignature wallets. 6 of those 11 signatures are required for a transaction to be completed, according to Lido’s post on withdrawal key generation. This means that hackers can approve withdrawals for the Lido DAO if six of these wallets are corrupted.

Lido cannot be trusted completely without the onboarding of validators. Each validator must undergo a Lido DAO vetting procedure. This is a great way to select the best validators but it can also cause friction, which goes against decentralization’s ethos.

Finding a major bug in Lido’s open-source code is another concern for users. Users should be aware that there were two major bugs already discovered. The first was in October 2021. It was fixed quickly so that hackers could not exploit it. This was the second serious bug that was discovered on March 20, 2022. This bug was fixed before exploits could be made.

stETH’s price could be lowered to ETH. It has happened before. It will be March 2022. Lido warnedDue to intense selling pressure, stETH’s price deviation was 4.2% compared with ETH. While this can liquidate leverage traders, it didn’t drastically affect long-term stETH holders, as the price peg eventually recovered. You should keep in mind though that stETH is always trading slightly lower than ETH because of the restricted withdrawals.

Lido has many benefits

The main value proposition of Lido Finance is that it lowers the entry barriers for ETH staking, making it user-friendly and accessible for retail investors who don’t hold 32 ETH to run their own validator node.

Institutions and ETH whales also benefit from Lido, since they aren’t limited to staking 32 ETH, instead being able to stake as many tokens as they want and compound their staking rewards.

The third major benefit is the increased capital efficiency created by the stETH token — which can be freely traded while simultaneously gaining passive income from one’s ETH stake. This allows stETH owners to use their tokens for collateral in lending, yield farming and other methods of generating yield.

With regular staking, the locked ETH tokens are stuck in the staking pool until validator withdrawals will be enabled on Ethereum’s Beacon Chain in the future. Lido offers staking rewards to all users every 24 hours.

Lido doesn’t require stakers to complete Know Your Customer (KYC) verification, further lowering the entry barriers for staking. The protocol will make the process more trustless, although potential node operator candidates still must be approved by Lido DAO.

Last but not least, Lido is a non-custodial protocol, meaning that there’s no central entity holding or controlling user assets. This means that there’s no risk of censorship or user assets being frozen, as we’ve recently seen with the centralized crypto lending platform Celsius.

The bottom line

Lido Finance plays a key role in Ethereum’s network. It currently holds 30.3% staked ETH on Beacon Chain. It’s also among the most popular DeFi protocols, with over 181,000 total stakers and $7,6 billion worth of total staked assets.

The protocol’s future adoption will largely depend on its roadmap and other proof-of-stake tokens that will be supported by Lido. Looking at Lido’s governance page, there are already proposals to add staking support for AVAX and NEAR — which would result in more protocol adoption by token holders.

As for Lido’s roadmap, decentralizing the validator selection process will also mean more validators and lower risks of penalties — as the protocol completes its decentralization roadmap.

Finally, the capital efficiency created by Lido’s stETH and other such tokens will be hard to ignore for institutional investors, as they can simultaneously earn staking rewards while deploying their stETH as collateral for other yield-generation products. Lido currently holds 30% of staked ETH and is on track to reach 50%.

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