Lido DAO
Market Recap
Another Tough Week For All Assets
Lido DAO
Over the past few articles, we have covered a few essential activities in Decentralised Finance (DeFi), including exchanging with Uniswap and earning with Aave, yearn.finance and MakerDAO. This week, we will explore how to stake your assets and earn a yield for doing so.
We have previously explained what staking is as well as the different ways to stake Ethereum as it moves to a Proof of Stake (PoS) network.
This guide will show you how to use the Lido DAO to earn a yield on your idle Ethereum and other PoS networks.
Staking Refresher
In a Proof of Stake system, miners or "validators", as they are known, use their crypto holdings as collateral and must put it up as a "stake" in order to earn the right to validate blocks according to the network's consensus rules. Just as miners in Proof of Work broadcast the newly mined blocks to the network and they are checked against their consensus rules by the nodes, so too are the blocks in Proof of Stake. However, in this system, if you are found to be "lying" about the transactions within the block by the network's nodes, you get your stake or collateral "slashed" or taken away.
These financial incentives are what inspire people to act honestly in the system; they have rules enforced by code that mean at any point in time, it is in your own best interest to contribute positively to the system as a whole.
What is Lido?
Lido offers Staking as a Service and is self-described as a liquid staking solution.
Staking can be a significantly complex process that requires a decent amount of technical understanding. Unsurprisingly, due to the complexity involved with staking, not only with Ethereum, we have seen the rise of companies and more decentralised alternatives which offer Staking as a Service.
As the number of projects using the Proof of Stake consensus mechanism increases, so do the number of companies that help abstract the process and make staking easier—traditional companies like Staked, Stake Capital, Stake.Fish and Stakinglab offer end-users the ability to either delegate or transfer their tokens to these companies, and they take care of the rest of the process for a fee, usually around 10% of the staking reward you would expect from the network. We also have witnessed the rise of more decentralised Staking as a Service alternatives like Lido or Rocket Pool. When we say more decentralised, we mean within the number of different validator groups or companies that sit under the service. They almost act as Staking as a Service aggregators. Lido has even launched its own governance token, LDO, that can be used to make decisions on matters such as which validator companies to use or what fees to charge.
All these companies and DAOs promise to ensure that they will act honestly as a validator and guarantee constant uptime for the node, thereby reducing the chances of having your stake slashed. They can also reduce some of the financial barriers to entry, such as you no longer need to put up 32 ETH and can enter with a much lower minimum, making the possibility of earning a yield on your assets possible for anyone.
How Does Lido Work?
Lido significantly reduces the complexity involved with staking assets. As previously stated, Lido operates as a DAO, and the LDO token allows members to vote on decisions made within the DAO, with one of the most significant being which staking services to use. Lido attempts to reduce the risk to users by utilising several different staking companies. You can see a list of them below:
This service is Lido's core offering. They allow you to deposit your compatible assets into a smart contract, and they take care of the rest. However, reducing complexity is not the only reason people use a service like Lido.
Lido has found tremendous success with its ETH 2.0 offering, stETH. ETH 2.0 staking is a niche market that has risen as Ethereum moves from a Proof of Work (PoW) to a Proof of Stake network. During this period, they need to test out the PoS chain to ensure that the transition happens smoothly. To do this, they asked ETH holders to move ETH from the PoW chain to the PoS chain and start staking and validating blocks. This allows developers to test the network in a live environment before launching it broadly, avoiding any critical errors. However, the one caveat here is that once you have moved the ETH across to the PoS chain, it is stuck there until the official migration to the PoS network. This process could take several months to years to be officially completed, and while there, you cannot do anything with that ETH except earn staking yield. Therefore Lido created stETH; a liquid ERC-20 token pegged 1:1 with ETH staked in Lido.
stETH represents your staked ETH in Lido; its value will fluctuate as it represents both the initial deposit and staking rewards you earn over time. These staking rewards are updated every day by the Lido oracles. This stETH is freely tradable on the current Ethereum PoW network and can be put to use in DeFi networks. As one could imagine, this has found massive demand as people can now earn a yield while being able to use their assets for other opportunities.
How To Use Lido
Lido currently offers staking services for Ethereum, Solana, Polygon, Kusuma and Terra. You will require a wallet for each network you plan to stake in. For the purpose of this guide, we will go through how to stake Ethereum and mint stETH.
You will be required to set up and fund a MetaMask wallet to do this.
Stake Your Ethereum With Lido
Step 1: Set Up MetaMask Wallet
In order to interact with Ethereum, you require a wallet. Our wallet of choice is MetaMask, but you are free to choose your own. Please find our guide to setting up your own MetaMask wallet here.
Once you have set up and funded the wallet with ETH you can now use Lido.
Step 2: Visit the Lido Website
Visit the Lido Website
Make sure you land on "https://lido.fi/"
You should see the below page:
Step 3: Stake Your ETH
Scroll down until you see the Ethereum 2.0 bubble
Click Stake now
You will be redirected to "https://stake.lido.fi/"
Click Connect wallet
Enter your MetaMask password when prompted
You will now see an overview that includes information such as the staking reward you can earn, the fees you will pay and the estimated gas costs for the transaction:
Decide on how many ETH you want to convert into stETH
Enter this into the box. Remember, this stETH will not be convertible back into ETH. But you can sell stETH on markets such as Uniswap for ETH or other assets
Click Submit
Your MetaMask will open, and you will now be required to sign this transaction. Please note that it does carry a gas fee, so please check you are happy with this before proceeding
The transaction may take some time, so be patient. However, once it is done, you will notice that the balance of the token you have deposited on your MetaMask has reduced, and the new stETH has taken its place.
If you can't see it, then you may have to add a custom token.
Open your MetaMask
Click Add Token
Click Custom Token
Input the following details:
Contract address: 0xae7ab96520DE3A18E5e111B5EaAb095312D7fE84
Symbol: stETH
Decimals: 18
Click Add Token to confirm
Step 4: Use Your stETH
Now that you have minted your stETH, you are free to either hold it or use it in other DeFi networks as collateral, lend it out or put it to work yield farming. If you no longer want to hold it, you can always swap it back into ETH with a decentralised exchange like Uniswap.
Conclusion
Using these networks is the best way to learn about them. It shows and allows you to understand what blockchain networks are capable of. Each has its own unique advantages, disadvantages and user experiences.
Projects like Lido have simplified the process and responsibility of staking, making it possible for users to earn a yield on their idle assets even if they don't have the technical capability or meet the minimum financial requirements. While they do pose concerns for the centralisation of a network, they currently can help many who would otherwise not be able to participate.
If you have any questions or have trouble using the network, please feel free to reach out and ask us questions. We always look forward to chatting with our readers. Otherwise, please feel free to share this article if you know anyone who is interested in using these networks.
Notable Articles and News Stories This Week:
Terra Community Halts and Patches Chain To Protect What's Left
The embattled cryptocurrency LUNA plummeted below a penny Thursday, as the Terra protocol continued to mint new units to meet redemption demand for its flailing UST stablecoin, which remains far from its intended one-to-one US dollar peg.
As the supply expands, the percentage of LUNA staked with validators shrunk, which created a new risk: a governance attack.
For the entire chain — and all its assets — to be secure, at least a third of the LUNA must be staked to honest validators that are processing transactions.
There are still 2.4 billion UST locked on the Anchor protocol and about $279 million in other staked assets, mostly bonded ether. If two-thirds of the LUNA were to be bought up on the cheap and staked to malicious validators, all those assets could be at risk — and it would take just a few million dollars' worth of LUNA to take over the chain validation.
Therefore, the validator community opted to simply bring the chain's block production to a coordinated halt, so as to execute an emergency upgrade that disables LUNA delegation.
Read more about the Luna story here
European Union Plans Pilot Project on DeFi Supervision
The European Union is eyeing first-time DeFi rules.
A pioneer in the development of data protection legislation through GDPR (General Data Protection Regulation), the European Commission also intends to be at the forefront of the rules that could shape a decentralised financial world.
In a recent report, the EU's executive arm revealed it will test an embedded form of DeFi's (decentralised finance's) supervision, which is now mainly unregulated, through a pilot.
"Adapting the EU financial services regulatory framework to a [decentralised] environment will require a rethink," the report states. A pilot project on "embedded supervision" will be launched this year in order "to benefit from the inherent data transparency on public blockchains."
Read more about the pilot here
In Industry First, S&P Gives Compound Prime Junk Credit Rating
The first institutional DeFi company rated by S&P Global received a B-, or junk, grade.
S&P Global Ratings has assigned Compound Prime a B- long-term credit rating. It is the first time an institutional DeFi (decentralised finance) offering has been rated by the agency,
Compound Prime, a Compound Labs subsidiary, has a stable outlook, but ratings issuers cited uncertain regulatory conditions around stablecoins and Compound Treasury’s currently “very low” capital base — as well as its 4% return obligation — as concerns.
Compound Prime oversees Compound Treasury, the company’s security offering that converts US dollars to stablecoin USDC and secures accredited investors a 4% return, according to Reid Cuming, Compound Treasury’s general manager.
Read more about the rating here
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