LIDO – What is it?

Introduction

Suppose you have special “Magic Coins,” and there’s a bank where you can put them to earn more. 

The catch is that once you have put these magic coins into your bank, your coins will be held there for a while, and you can’t trade them to earn more.

Now, what if I tell you that you can get a magic pass. It lets you use your tokens anywhere, even though they’re still in the bank. This magic pass makes the whole process easier and more fun, so more people can join without feeling stuck or confused.

In the crypto world, LIDO can be your magic pass. Let’s understand how LIDO works. What are the risks and benefits of it, and much more. Let’s hop in.

What is LIDO?

LIDO is run by a DAO and was established in December 2020, a few weeks after the release of Ethereum 2.0. In just one year since its launch, LIDO has grown to become one of the most well-liked platforms for liquid staking. LIDO which was first created with an emphasis on Ethereum, is now growing to include other blockchain networks.

LIDO offers a liquid staking option since the assets are locked during the initial staking. Liquid staking is the process of using other protocols to obtain liquid tokens in return for depositing tokens, and LIDO allows the liquefaction of assets for use.

The Illiquidity of the Stak assets is one of the difficulties in staking. Users are deprived from the chance to profit of the extra yields when the tokens are locked and cannot be accessed or unstaken until the lockup period expires. 

LIDO is providing an alternative to Conventional POS staking in order to increase the liquidity of staked tokens and to make staking more accessible.

Now you might be wondering what is staking, let’s see.

What is Staking?

In the world of cryptocurrency, making money doesn’t always mean selling your investments when their prices go up. Another way is through staking, a method where you use your digital assets to earn money without selling them.

Think of staking like putting money in a savings account that pays you interest. When you stake your crypto, you’re locking it up for a specific time to support how a blockchain operates. In return, you get more cryptocurrency.

Some blockchains, like Solana (SOL) and Ethereum (ETH), use a proof-of-stake system. Here, people who want to help the blockchain by validating transactions and adding new blocks stake a certain amount of cryptocurrency.

Staking is like an insurance policy. If these participants validate transactions correctly, they get more crypto as a reward. But if they make mistakes or validate fraudulent data, they might lose some or all of their staked crypto as a penalty.

So, staking not only helps the blockchain run smoothly by ensuring only valid data gets added, but it also lets you earn rewards for contributing to the system. It’s a way to make your crypto work for you without selling it!

How does LIDO work?

So now we understand what staking is. Let’s talk about how LIDO works.

There are three steps:

Step 1: Stake

First, you need to stake some of your tokens. Staking means putting a certain amount of your digital assets into the LIDO platform. By doing this, you become eligible for daily rewards.

Step 2: Receive stToken

In return for staking your tokens, you receive something called stTokens. These are like special tokens that represent your stake. The cool thing is, you start getting rewards in real-time once you have these stTokens.

Step 3: Use in DeFi

Now, with your stTokens in hand, you can use them in the world of decentralised finance. It’s like putting your stTokens to work across various DeFi platforms, helping you earn even more rewards on top of your daily staking rewards. It’s a way to make your money work for you!

Risk involved in staking on LIDO

Distributed Custody: 

Funds are held in smart contracts, and withdrawal keys are controlled by 11 individuals, introducing potential risks.

Smart Contract Vulnerabilities: 

The smart contracts may have vulnerabilities or bugs, posing a security risk to staked funds.

Technical Risk: 

ETH staking relies on Ethereum’s proof-of-stake chain, and unforeseen technical issues could arise.

Adoption Risk: 

The value of ETH and stETH is tied to the growth and adoption of Ethereum, impacting the value of staked assets.

DAO Key Management Risk: 

If key signatories are compromised, funds could be at risk of becoming inaccessible.

Alternatives of LIDO

Rocket Pool: 

Similar to LIDO but utilises its own Rocket pool protocol token that appreciates with platform usage. Lower fees than LIDO.

Sushiswap Liquid Staking: 

Integrates with DeFi platform Sushiswap, offering additional yield opportunities through staking rewards and Sushiswap LP participation. Lower TVL and slightly higher fees compared to LIDO.

StakeWise: 

Decentralised staking protocol with a strong focus on security and transparency. Non-custodial approach but lower returns compared to other options.

Conclusion  

LIDO’s liquid staking service is like a magic trick for users – you get all the benefits from staking without locking up your tokens! 

It’s like a win-win for both small and big token holders, letting them stake and unstake whenever they feel like it. No need for tricky setups or big hurdles to join – LIDO makes it easy for anyone to get into staking. It makes staking simpler and more accessible.

LIDO is helping DeFi grow bigger and better for all of us in the future! It is opening the door to more opportunities in the world of decentralised finance.