Staking is a lucrative option for crypto investors to generate passive income. Since Ethereum has adopted the Proof-of-Stake consensus mechanism, more investors have converted their assets to ETH to take advantage of ETH staking. But it has several problems with it.
Previously, the investors were required to lock their ETH tokens for a fixed period. It means the investors can’t withdraw their funds even if they need them. However, the Shanghai upgrade has solved this problem to some extent. But the investors still need to stake 32 ETH tokens to participate in the process.
An average retail investor can’t hold such a big amount of ETH tokens. Fortunately, liquidity solutions like Lido are trying to accommodate all types of investors.
Key Takeaways: –
- Lido Staked ETH (stETH) provides a liquid staking option for Ethereum, allowing investors to earn staking rewards while still having the flexibility to use their stETH tokens for various DeFi applications.
- Lido’s approach lowers the entry barrier, enabling both large and small investors to participate in staking without the need for locking a fixed amount of ETH tokens.
- stETH holders can explore various DeFi use cases, including yield farming, liquidity provision, and lending, enhancing their potential for additional rewards and engagement in the DeFi ecosystem.
What is Lido?
Lido is a liquid staking solution for Proof-of-Stake crypto projects. It provides staking facility for Ethereum, Kusama, Polkadot, Polygon, Solana, and more. Lido uses a decentralized governance system to run its operation. LDO token holders have the voting rights to define the project’s future.
The unique thing is that Lido has an independent governance infrastructure that doesn’t affect the performance of other adaptable protocols on the blockchain.
Understanding the Liquid Staking
Locking tokens is the major drawback of staking because investors can’t withdraw their funds even if they need them. Liquid staking provides a reasonable alternative to the problem. The liquid staking platforms provide a tokenized version of the deposited tokens that users can use to purchase products and services while enjoying staking yields.
The best part is that the investors can earn additional yield by depositing their stAssets on other DeFi protocols. The stAssets are generated on a 1:1 basis. So, if a user has deposited 5 ETH tokens, he will receive 5 stETH tokens from the platform that they can use for other transactions.
How Does Lido Work?
Lido is a liquid staking platform that lowers the entry barrier allowing anyone to participate in the staking. It also solves the problem of locking tokens by generating stAssets. Lido uses smart contracts to manage withdrawals and deposits. Smart contracts are also used to mint and burn tokens. Similarly, they keep a record of reward distribution.
Lido allows investors to earn block rewards by staking a fraction of ETH or other tokens. Lido mints stETH tokens as soon as the user deposits ETH tokens in Lido’s staking pool. And when a user requests the withdrawal of funds, the smart contracts burn the stETH tokens associated with the request.
The ETH tokens are distributed among validators so they may deposit them on Ethereum’s mainnet to validate blocks. The validators can’t access the funds directly because they’re locked in a smart contract.
The node operators can only validate transactions by using the public validation key. The platform eliminates the risk of single-point failure by distributing the stake assets among multiple validators.
How stETH Works?
stETH represents the staked ETH tokens on Lido. The platform generates one stETH token for each ETH token staked on the network. The users can use these tokens as collateral in crypto lending platforms or they can sell or spend them on relevant platforms.
Lido uses a socialized staking mechanism to reward the stakers. Therefore, they start receiving staking rewards right from the day when they deposit their funds. So, the users don’t need to wait for their ETH tokens to be added to the queue. The investors can earn additional rewards by depositing stETH tokens in various DeFi platforms.
However, stETH offers lower staking rewards compared to the Ethereum Beacon chain. The difference occurs because only a few Lido validators can make it to the queue whereas the stETH rewards are distributed among all stETH holders. However, the platform will soon overcome this problem by encouraging more validators to stay active.
Lido has an insurance fund, a staking pool, and an Aragon-powered DAO. The platform charges a 10% fee from staking rewards to successfully run its operations.
Use Cases of stETH
Like ETH, stETH can be used in the DeFi ecosystem. The token holders can use it to generate additional rewards.
- Yield Farming – The token holders can deposit their tokens with yield aggregators to earn additional rewards. Yearn Finance and Harvest Finance are popular aggregators that maximize rewards by spreading the assets across a range of platforms including Sushiswap, Curve, and more.
- Liquidity Pools – stETH token holders can provide liquidity to various DeFi platforms like Curve, 1inch, Sushiswap, and Bancor. The stETH token holders can earn LDO tokens and the native tokens of the DeFi protocol by providing liquidity.
- Lending – stETH token holders can also add their tokens to lending platforms to earn interest. Similarly, they can borrow ETH tokens from these platforms by providing stETH tokens as collateral. They can then restake the borrowed ETH tokens to earn additional staking rewards.
Lido Staked ETH Tokenomics
stETH is the native token of the platform that is used to run its operations. The supply of stETH tokens may vary depending on the ETH tokens deposited by the investors. With a circulating supply of 7.8 million tokens, stETH has a market cap of $92 million. It ranks among the 200 best cryptocurrencies in terms of market cap.
Lido Staked ETH (stETH) offers a liquid and accessible solution to Ethereum staking, allowing investors to earn rewards while maintaining flexibility. With a decentralized governance system and diverse DeFi use cases, stETH presents a promising option for crypto investors seeking passive income opportunities in the evolving blockchain landscape.
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