As the leading ETH staking project, what is the value of Lido Finance?

By Daniel Li, CoinVoice
In the first half of 2023, the Ethereum Shanghai upgrade became the most watched event in the cryptocurrency circle. The upgrade will allow withdrawals of staked ETH, which is expected to attract more users to invest in ETH. In this context, Lido Finance (Lido) has become the focus of attention. As the largest staking protocol on the Ethereum beacon chain, Lido has a TVL of $8 billion, accounting for 30% of the staking volume on the beacon chain, and is the DeFi protocol with the highest TVL.
 
Lido may become the biggest winner
 
The penalty imposed by the U.S. Securities and Exchange Commission (SEC) on Kraken has triggered changes in the ETH staking landscape. This has prompted more and more centralized institutions to turn their staked ETH to decentralized institutions, among which decentralized ETH staking protocols represented by Lido have benefited greatly. In addition, Ethereum's Shanghai upgrade will launch a withdrawal function, which is expected to further promote the growth of ETH staking protocols. The combination of these news has made more and more investors optimistic about Lido, and its token LDO has attracted much attention from the market. In the past month, LDO has risen by more than 50%. As of now, the price of LDO is $2.99, with a market value of $2.513 billion, ranking 25th in market value.
 
The US SEC's heavy blow to ETH staking will usher in a new pattern
Last week, the cryptocurrency exchange Kraken was accused by the U.S. Securities and Exchange Commission (SEC) of failing to register the offer and sale of its crypto asset pledge-as-a-service program. The SEC said Kraken attracted investors by promoting a return on investment of up to 21%, but Kraken did not provide appropriate disclosure and investor protection measures. In order to settle the SEC's charges, Kraken agreed to immediately stop providing pledge-as-a-service to U.S. customers and pay a $30 million fine.
The SEC's heavy blow to the leading staking platforms has shaken the entire industry. Coinbase, a centralized exchange that also provides staking services, is deeply concerned about this. Although there are reports that Coinbase suspended ETH staking services in October last year, the current scale of ETH staked by Coinbase is still second only to Lido in the ETH staking market. Once the SEC is determined to completely ban retail investors from participating in staking services in the US market, Coinbase is likely to become the next target.
After the SEC ruling, investors seem to think that this is good for "decentralized" staking platforms. Because decentralized staking platforms do not rely on centralized institutions or companies, but use decentralized smart contract mechanisms to achieve liquidity staking services for digital assets, they are least affected by regulatory policies. According to data, the day after Kraken's penalty results were announced, the governance token of Lido, the largest decentralized staking platform, soared 11%. It is foreseeable that with the termination of staking services on some centralized staking platforms such as Kraken, more and more users will flock to decentralized platforms in the future. As the first-ranked platform, Lido will undoubtedly benefit the most.
 
Shanghai upgrades ETH pledge track and will usher in an explosion
Ethereum is one of the public chains with a lower staking rate, with only 12% of tokens currently being staked. In comparison, the staking rates of other public chains are usually between 60% and 80%, which shows that Ethereum still has a lot of room for improvement. In addition, other public chains often attract users to stake by increasing the annualized rate of return, but this practice may lead to a reduction in the value of staked tokens and lack sustainability. Ethereum is different. Since its merger, ETH has entered a deflationary phase, and with the continued prosperity of the Ethereum ecosystem, the economic incentives for ETH staking have become more sustainable and attractive. In general, the ETH staking track has the potential to explode, and what is lacking is only the timing, and the Ethereum Shanghai upgrade may become this opportunity.
The Shanghai upgrade will inject long-term vitality into ETH staking. The withdrawal function that will be opened at that time will allow users to withdraw funds from the beacon chain, allowing ETH validators to cancel their stakes and decide to sell or hold. A portion of the decompressed ETH will enter the secondary market, but due to the restrictions of the validator exit mechanism, the market will not be greatly affected. Although it will have an impact on the total amount of ETH staked in the short term, the staking ratio may continue to rise afterwards. Because the ETH staking mechanism has become more flexible after the upgrade, it can be freely withdrawn instead of having to be locked for a long time, which may attract more holders to use ETH for staking to earn income. This is like a bank deposit changing from a time deposit to a demand deposit. The calculation method of deposit interest remains basically unchanged, but the amount of deposits may increase.
Ethereum Shanghai upgrade is good news for Lido, but also a challenge. After the upgrade, the scale of ETH pledge will surge, which is a good opportunity for decentralized pledge platforms such as Lido to expand. However, after the Shanghai upgrade, the pledged ETH can be withdrawn. The previous model of Lido that can redeem the pledged ETH at any time will no longer have an advantage. For Lido, how to build a new moat has become a challenge that it will face soon.
 
Lido's advantages are highlighted from a technical perspective
 
Lido is a liquidity staking protocol established in October 2020. It was created to address the limitations of EHT2.0 staking and insufficient liquidity. If users want to participate in ETH2.0 staking independently, they need to stake 32 integer multiples of ETH, which is very unfriendly to retail investors. Lido is more user-friendly in terms of the number of staking. Users can participate in ETH2.0 staking by staking any amount of ETH. With its friendly staking model, Lido quickly gained market recognition as soon as it was launched. At present, Lido occupies more than 75% of the staking market and 30% of the ETH staking market, becoming a well-deserved industry leader.
 
Lido’s staking principle
Lido introduced staked ether (stETH) or Lido stETH as a liquid staking solution. This allows users to stake any amount of ETH they wish while still being able to use that ETH on other decentralized finance (DeFi) platforms. The specific process is that users provide their scattered ETH to Lido, and after receiving the user's pledge, Lido will distribute it to node operators approved by Lido DAO for staking in portions of 32 ETH. Stakers who stake ETH through the Lido protocol can obtain stETH as a voucher at a 1:1 ratio, which represents the user's staked share in Lido and corresponds to the staked ETH.
stETH plays an important role in the Lido ecosystem. It is the main credential of the Lido platform. Users holding stETH tokens can obtain the benefits of their staked ETH, such as staking rewards, handling fee sharing, etc. At the same time, users can also use stETH tokens for transactions and circulation in the ecosystem of Lido partners, such as liquidity mining and trading in platforms such as Curve, Yearn and ARCx.
The transferability and tradability of stETH make Lido's staking model more liquid than other platforms. In addition, stETH can be exchanged for ETH at any time through the LP of stETH-ETH on CRV. Before the Ethereum Shanghai upgrade, this is also the advantage that Lido can quickly lead other staking platforms.
 
Lido's profit model
At present, Lido's profit model mainly relies on taking 10% of the staking income as protocol income, of which 5% belongs to the staking node operator and the other 5% goes to the Lido treasury, which is governed by LDO. Staking income is less affected by market fluctuations, so its currency-based income is almost unaffected by the bear market. In December, Lido's protocol income was only slightly less than GMX, and the total protocol fee exceeded Uniswap. In addition, affected by the expected upgrade of Shanghai and Lido's leading position in the industry, Lido will absorb more staking assets in the future, and these staking assets will also bring higher protocol income to the Lido platform. LIDO's continued rise this year also reflects people's market sentiment towards Lido.
 
Lido V2 Upgrade
With the upcoming Shanghai upgrade of Ethereum, DeFi platforms that provide ETH staking services must also upgrade immediately to adapt to the new changes. As the largest ETH staking service provider, Lido announced the launch of the Lido V2 upgrade on February 8, which is the largest upgrade to date and a major change on the road to further decentralization.
The Lido V2 upgrade will be carried out in two aspects: Staking Router and Withdrawal.
 
Pledge Router
The staking router is a controller contract that aims to gradually evolve Lido into a scalable protocol through modular infrastructure. The core idea is to treat various modules as potential suppliers of the protocol to form a validator pool. Each module will be responsible for managing internal node registration, storing validator keys, and allocating staking shares and rewards. Modules can include various types of node operators, from community-assessed stakers to professional or newly established staking institutions to DAO organizations. They can run validators independently or collaboratively through infrastructure such as DVT, and can participate in multiple modules at the same time.
The Staking Router is a major upgrade to the Lido Protocol that enables stakers, developers, and node operators to frictionlessly coordinate on Lido and benefit from:
Stakers: As the number of node service providers increases, users' staked deposits will be distributed among more service providers, thereby reducing the risk of network downtime and improving Ethereum's resilience.
Node Operators: Through the new module, other types of node operators, such as independent stakers, small groups, DAOs, and professional node operators will be able to increase their ways of participating in the Lido Protocol.
Developers: Users can propose and execute models with different combinations of node operators and their competitive features (such as coverage options and fee structures), and can also apply to join the module collection of the staking router.
 
Withdrawals
Lido V2 will optimize the withdrawal function, one of the basic features, balancing user experience, operation speed and protocol security. The upgrade allows Staked Ethereum [stETH] holders to withdraw their tokens from the Lido ecosystem at a 1:1 ratio, without additional fees or penalties. However, due to the complexity of the Ethereum network, the withdrawal mechanism in the Lido protocol design will have two modes: Turbo and Bunker.
Turbo Mode: This is the default mode, where withdrawal requests are fulfilled quickly, but the time to exit the network is uncertain. Withdrawal requests may take hours to be processed. To reduce possible delays, contributors have proposed automation tools to help protocols and node operators automate the process around validator exits.
Bunker Mode: In order to handle withdrawals in an orderly manner under catastrophic scenarios, Bunker Mode is proposed. Its purpose is to prevent sophisticated participants from gaining unfair advantages over other stakeholders by delaying withdrawals and socializing negative impact throughout the protocol.
The Lido V2 upgrade points the way for Lido's future development, and the new modular architecture design brought by the staking router will further help Lido achieve decentralization. With the development and withdrawal of the beacon chain, new requirements have been put forward for the current ETH staking model. As an industry leader, Lido has long been prepared for this day. Lido V2 will become Lido's new moat, driving Lido to become a more inclusive, open and transparent platform.
 
Can Lido maintain its leading position in the long term?
 
Lido's extremely high market share almost monopolizes the entire staking market, which has aroused the concerns of some investors. Among them, Vitalik suggested that staking projects should self-limit the number of stakes they control, and proposed 15% as the upper limit threshold. However, Lido did not accept this suggestion. As early as June 24 last year, Lido Dao voted on whether it should be "self-restricted". As a result, 99.81% of LDO holders voted against it and disagreed with self-restriction of Lido. The main arguments of opponents are: "If we don't do it, others will do it", "CEX will do it", and "no one can meet the demand at present."
On the other hand, if the dominance of the ETH staking market is handed over to centralized institutions, such as Coinbase, whose market share is second only to Lido, this may not necessarily be a good thing. First, this goes against Ethereum's goal of building a decentralized network. Second, centralized institutions are more susceptible to regulatory intervention, such as the US SEC's punishment of Kraken. Therefore, it seems unlikely that centralized institutions will replace Lido to dominate the ETH staking market.
From the data, Lido is already in the leading position of the entire industry, and it is difficult for successors to compete with it. According to Dune data, as of February 18, the total stake of the Ethereum beacon chain has exceeded 16.7 million ETH. Among them, Lido is the only one, with a stake of 4.92 million ETH, accounting for 29.34% of the market share, which is equivalent to the sum of the centralized staking institutions ranked second to fifth. Coinbase ranks second, with a market share of 12.34%, less than half of Lido. Kraken ranks third, second only to Lido and Coinbase, accounting for 7.36% of the total stake of Ethereum. Kraken has just received a penalty from the US SEC. Although Kraken claims to stop staking services only in the United States, it is still inevitable that customers will be lost.
As Kraken stops staking services, ETH from centralized institutions will continue to flow to Lido, and Lido’s market share is expected to maintain and steadily increase.
Although Lido's extremely high staking market share has always been criticized, it is undeniable that without ideological concerns and external interference, Lido's liquidity, composability and yield have absolute advantages in the ETH staking market. In a winner-takes-all market, Lido's market share is the result of market competition and an inevitable trend of ETH staking decentralization. With the upgrade of Ethereum Shanghai and the restrictions of the central staking agency policy, investors are generally optimistic about Lido's future development trend.
 
Summarize
 
The goal of the Lido protocol is to make staking simple and secure while maintaining the decentralization and censorship resistance of Ethereum. Over the past two years, the Lido protocol has continued to grow and become an integral part of the Ethereum ecosystem and the entire DeFi space. Currently, Lido has 100,000 addresses staking more than 4,815,040 ETH, achieving a huge success in the goal of democratizing staking access. In the future, Lido will continue to move forward firmly in the direction of trust-based staking and network democratization.