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Lido Finance is an unmanaged liquidity staking service based on Ethereum. The protocol provides liquidity to equity holders’ assets through the issuance of tokenized derivatives, such as stETH. LDO is the Token of this protocol. The token allows users to receive collateral gains while holding alternative tokens, thus allowing token holders to deploy their assets throughout DeFi.
Officially, Lido, a liquidity staking protocol, has announced the completion of a $24 million financing round by Dragonfly to purchase 10 million LDO from the Lido DAO Vault and complete the payment through two transactions.
The operation logic of Lido
The normal staking on the Ethereum blockchain is as follows: users lock their ETH into the pledge pool and gradually receive more ETH as a reward for helping to secure the Ethereum network. Once a user locks the tokens for staking, the tokens can no longer be used for other purposes.
The logic of a liquidity staking protocol like Lido is this: the pledged ETH is returned to the users’ stETH. The new stETH represents a tokenized share of the number of ETH pledged by users.
In addition, users can freely deploy stETH in other DeFi protocols.
Lido makes Staking easier by pooling funds together. At the same time, since it takes time to pledge and release the pledge on the network, more governance rights can be used through this period of several days to several months. With Ethereum, early pledgers may have to wait until later stages of the merge to unpledge, which could take years.
As of this writing, more than $5.8 billion of ETH is pledged by Lido. As a result, LDO holders have significant governance rights not only over the protocol itself, but also over the Ethereum network.
LDO Token Economics
The use case for LDO is governance of the protocol. There is currently no buy-back or lock-in supply mechanism to enable an LDO, meaning that an LDO is more akin to a pure equity interest. Still, the token economics of the LDO still play an important role in influencing its price movements.
– Token allocation
token supply allocation of LDO
The total supply of Lido is 1 billion tokens. 36% is allocated to DAO Treasury, 35% to team members (including founders, initial developers, and future employees), 22% to investors, and 6.5% to pledge verifiers and withdrawal key signers.
The latter three groups of tokens have a one-year lock-up period followed by a one-year vesting period. 63.5% of the total supply is allocated to people within the protocol. The project side’s control of Lido is highly centralized. In addition, selling pressure due to the expiration of the lockup period will also put downward pressure on LDO prices.
– Token release
The volume of LDO releases is an area of uncertainty for LDO holders as there is no pre-set timeline for coin offerings. Instead, the decision to issue or distribute tokens can be made at the DAO’s discretion.
The advantages of Lido
Ethereum’s transition to a PoS mechanism means it will rely on verifiers to verify transactions on the blockchain. However, to operate the verifier node, the user must save 32 ETH. Lido allows the user to override the requirement and get an incentive. This makes Lido the largest pool of pledges on Ethereum by percentage.
First, it dramatically increases the accessibility of ETH unmanaged collateral. It is well known that ETH self-hosted staking is difficult for many users. Lido simplifies the process of mortgaging ETH, making it as simple as using any other DeFi protocol, transferring technology and risk reduction to the world’s top operating nodes.
More importantly, because of the concentration of user funds, holders with less than 32 ETH required to run the validator can now pledge and receive passive income from their holdings. StETH tokens also provide users with a means of liquidity. As a new type of collateral asset, Lido users can earn pledged proceeds, maintain their share of the network, and unlock the value of their tokens. In other words, stETH can be used as collateral for other DeFi protocols, greatly increasing the utility of its collateral position.
By having the lion’s share of the pledge advantage, it will enable the DeFi platform to have a significant impact on transaction verification. Although this may come with risks, including verifier cutbacks, governance attacks, and smart contract vulnerability exploitation. On the other hand, Lido’s dominance in Staking can help prevent acquisitions by centralized exchanges and ensure that Ethereum remains decentralized.
The industry in which Lido Finance is Staking is growing, and there will be continued ETH2.0 dividends in the future. In the future, with the progress of ETH2.0 and Lido’s current dominance on the track, its TVL will continue to grow. With the increase of ETH2.0 pledge scale, the total revenue generated by the agreement will gradually and marginal decrease.
However, it is expected that Lido’s TVL growth will far exceed the margin reduction in pledge revenue, and with the increasingly blurred boundary between stETH and ETH, and the features that will lead to higher revenue, Lido will continue to be an important experiment in DeFi until ETH2.0 actually comes online.
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