To grasp what and how the Lido staked ether (or stETH) works, you must first have an understanding of the Lido protocol and the concept that underpins its existence. That said, the Lido Protocol which operates on its own proprietary blockchain is a decentralised network for storing liquidity across different blockchain networks.
Specifically, the Lido protocol aggregates staked assets from liquidity providers and locks them up for a pre-determined duration, after which users gets to withdraw their assets alongside their yields – commission-based earnings, for example.
Currently, there are three major networks in which users can choose to participate in the liquidity pooling. They include Ethereum, Terra, and Solana.
One of the advantages of the Lido protocol is the ability to use staked assets as collateral for lending, yield farming, and other activities within the Defi ecosystem that supports the native token of the network in which an asset is staked. So what’s Lido’s relationship with Ethereum?
Lido’s relationship with Ethereumm
Notably, Lido offers a staking solution for the upgraded Ethereum V2.0 by acting as a reserve for staked Ethereum asset. Lido is, in fact, addressed prominently as the future of liquidity staking on Ethereum 2.0
What is Lido staked Ether?
Notably, stETH token balances are pegged 1:1 to the ethers that are staked by Lido and the token’s balances are updated daily to reflect earnings and rewards.
In addition, stETH tokens can be used as one would use ether, allowing you to earn ETH 2.0 staking rewards while benefiting from yields across decentralised finance products. That said, stETH tokens are minted upon deposit and burned when redeemed.
How does Lido staked Ether work?
As mentioned earlier, Lido offers liquidity staking as a service, which implies locking up an asset by staking it for a period of time. In this context, Ethereum’s Ether token (or ETH) is being locked up in the Lido liquidity pool.
In exchange, Lido gives the liquidity provider its newly minted representative ERC-20 token, called stETH, which as described earlier has a 1:1 value-to-ETH ratio.
Because the whole project aims to provide fully decentralised ETH staking services, the DAO is a critical component of Lido staking Ether. Specifically, the DAO system is required to ensure the platform’s governance and upkeep. Likewise, all decisions, proposals, and updates made to the network are totally transparent, thanks to the DAO system.
Technically, the Lido platform’s pooled funds from investors and validators make up the network’s overall stake in Ethereum, from which reward is generated and then distributed to stakeholders in percentages based on their stake.
Also, Lido takes 10% across each investor’s rewards, of which 50% of the collected fees go toward building insurance and security for its users as well as for the platform’s improvement.
Difference between Lido staked Ether, and Lido DAO token (LDO)
Lido staked ether, otherwise known as stETH, is one of three tokens issued to users who staked in the Lido liquidity pools (Others include stSOL and stLUNA for Solana and Terra liquidity pool respectively).
Specifically, Lido staked Ether is issued when a user locks up Ethereum tokens in the Lido Ethereum liquidity pool, which further implies a proof of investment for a liquidity provider. The ERC-20 token is also given as a reward for participating in the liquidity pooling.
On the other hand, Lido DAO token (or LDO) is the native asset of the Lido protocol. While it primarily functions as the utility token on the platform, LDO can also be used to facilitate any of these three activities; to grant governance right; to manage fee parameters and distribution and; lastly, for governing the process of adding and eliminating Lido node operators.
Ultimately, Lido staked Ether is a component of a liquidity protocol, which means its success in the crypto market is reliant on the overall performance of the host protocol as well as other applications in the DeFi ecosystem.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.