Lido DAO tokens capture value through staking rewards, with the DAO receiving 5% of all staking rewards in real time. The Lido protocol charges a 10% fee on staking rewards (this can be changed via the DAO) and is distributed to node operators and the DAO. Lido DAO accumulates value with staking rewards, and the DAO instantly receives 5% of all staking rewards.
What is Liquidity Staking?
Liquidity staking allows users to earn staking rewards while maintaining the liquidity of their pledged positions. Liquidity staking protocols allow users to earn staking rewards without locking up their tokens or maintaining staking infrastructure. After users deposit tokens, they will receive tradable and transferable liquid tokens. The DAO-controlled smart contract uses selected node operators to stake user-deposited tokens. Since users’ tokens are controlled by the DAO, node operators can never directly touch or use users’ tokens.
What is the difference between liquid staking and independent staking?
Liquidity staking removes many of the limitations associated with standalone staking. Ethereum will soon become the largest staking economy in the space. However, staking on Ethereum requires expertise and complex and not cheap infrastructure. There are several reasons for this. Chief among them is that misconduct reductions and offline penalties can become very severe if staking is not managed properly. In addition to this, self-staking requires a minimum deposit of 32 ETH and a token lock that may last several years.
By using a liquid staking service like Lido, users can eliminate these inconveniences and benefit from secure and non-custodial staking backed by industry leaders.
What are the risks of staking on Lido?
There are smart contract and slashing risks when staking with Lido. Lido is a liquidity staking solution with Ethereum staking as its core business. Launched in December 2020, Lido has become a mainstay project in DeFi. Lido prides itself on its transparency and security, and Lido contributors work hard to provide users with best-in-class staking solutions.
This means: open source development work and constant review of all code.
A first-class pool of validator nodes selected based on DAO voting to minimize the risk of slashing.
Use a non-custodial staking service to reduce the risk of any party getting involved.
Use DAOs for governance decisions to control risk factors.
Potential risks of Lido staking
Lido DAO aims to mitigate risks and eliminate them as completely as possible. Still, there are potential risks when staking ETH with Lido:
Smart contract security: The risk of the Lido protocol itself is that it may contain smart contract vulnerabilities or errors. Lido code is open source, audited, and deeply tied to bug bounty programs to minimize this risk.
Technical risk: Lido is built on actively developed experimental technology, and there is no guarantee that Ethereum development will be free of errors and vulnerabilities. Any vulnerability in Ethereum itself will bring the risk of reduction, as well as the risk of stETH value fluctuation.
Adoption Risk: The value of stETH is built around the staking rewards associated with the Ethereum beacon chain. If Ethereum fails to reach the anticipated levels of adoption, we may experience significant fluctuations in the value of ETH and stETH.
Risk reduction
Ethereum validators may face the risk of staking penalties. If the validator violates certain rules during operation, the pledged funds will face the risk of being fined. To minimize this risk, Lido stakes users’ ETH through multiple professional and reputable node operators and additionally uses Lido revenue as insurance payouts.
stETH price risk: Due to Lido’s withdrawal restrictions, users face the risk that stETH will trade below its intrinsic value.
Summarize
Lido DAO accumulates value with staking rewards, and eliminates many of the inconveniences of independent staking with liquidity staking. However, there are still potential risks associated with staking with Lido, including smart contract risk, technology risk, adoption risk, mitigation risk, and stETH price risk. Lido is committed to mitigating these risks through open source development, continuous review, and DAO governance. Through these efforts, Lido provides users with a safe and efficient staking solution.