Lido (LDO): Analysis of the liquid staking champion

The Big Whale's opinion 🐳

The LDO token is clearly one of the assets to watch, as Lido is currently the best positioned project in liquid staking, a fast-growing activity.

It is the protocol that is capturing the most value in decentralised finance (DeFi) and it is already profitable.

Lido has attracted capital from very prestigious funds such as Andreessen Horowitz (a16z) and Paradigm.

However, the LDO token does not allow you to benefit from the returns generated by the protocol. Its price is therefore based more on the overall attractiveness of the project rather than the usefulness of the token.

Lido could come under particular scrutiny from regulators who are increasingly interested in staking.

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Financing 💰

Lido has raised $143m in two funding rounds.

The first ($73m) took place in May 2021 with Paradigm Fund leading the way, along with Coinbase Ventures, DragonFly Capital and Delphi Digital.

The second took place in May 2022 with the entry of giant fund Andreessen Horowitz (a16z), which invested $70 million on its own.

As the vesting period ended in August 2023, all LDO tokens have already been distributed to investors and the team. There is therefore no longer any fear of a simultaneous mass sale of large historical portfolios.

Since May 2023, Lido has distinguished itself as one of the few profitable decentralised protocols. Fees collected outweigh cash expenses, generating more than $20 million in profits over the last 365 days.

Almost all cash is made up of tokens directly related to the protocol (76% LDO and 23% stETH). In the event of a major market crash, the cash position would be exposed to a sharp fall in value.

The emergence of the re-staking trend, driven by the EigenLayer project, seems to bring new financial prospects to liquid staking protocols, and Lido in the first instance.

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Overview 🧬

Launched in 2020, Lido is the leading liquid staking protocol. This activity involves depositing cryptocurrencies (with no minimum threshold) to secure blockchains in exchange for returns (3% to 4% annually on Ethereum), while retaining the liquidity of assets normally tied up.

When you deposit ETH on Lido, you receive the equivalent in stETH. The stETH balance in the user's portfolio increases daily to reflect the return on staking.

StETH can be used in many other decentralised finance protocols and sold at a similar price to ETH.

Price parity between ETH and stETH is maintained because any stETH holder can exchange them for an equivalent quantity of ETH on the Lido protocol (subject to a delay of several days). If prices diverge, there is an economic incentive to arbitrage between the two tokens to restore parity.

Lido currently dominates the liquid staking market. Its total locked-in value (TVL) is $21 billion, far ahead of its nearest competitor, Rocket Pool, which has a TVL of $2.8 billion.

Lido's TVL exceeds that of all other decentralised finance protocols, with Maker in second place ($8.2 billion). In addition, Lido accounts for a third of all ETH staked in total, playing a major role in the governance and security of Ethereum.

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The LDO token 📈

The Lido protocol is governed by a decentralised autonomous organisation (DAO) governed by the LDO token. There is a limited quantity of LDO set at 1 billion tokens. LDO owners can submit and vote for proposals on how the protocol should operate.

The LDOs were initially distributed between the protocol treasury (36%), the team behind the project (35%), investors (22%) and partner validators (6.5%). The LDOs in the treasury are mainly used through liquidity mining programmes: they are distributed to stETH users in the various DeFi protocols in order to promote the use of stETH.

Currently, the treasury is made up of around $415 million (76% LDOs and 23% stETH) and this is replenished by the 10% commission that the protocol takes from all user staking rewards (5% is paid back to validators). The remaining 90% is distributed to users.

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Team & community 👾

Lido was created by two Russians, Konstantin Lomashuk and Vasiliy Shapovalov, and American Jordan Fish. The latter, better known under the pseudonym "Cobie" (more than 700,000 followers), left the team around 2021.

The first two are not on their first project together. They founded Cyber Fund back in 2014, a structure that has invested in numerous crypto projects such as Solana and Celestia. In December 2023, Cyber Fund announced a sort of revival of the project with, in particular, the launch of a $100 million venture capital fund dedicated to blockchain, robotics and AI.

Lido's founders communicate fairly little about their role within the protocol. The paucity of information about the founding team and its current role in the project should make investors wary, even if it may also prove beneficial for decentralisation not to have a tutelary figure.

There are currently around 30 developers active each month on the protocol and an average of 3,300 users interacting with the smart contract each week.

Lido has a very large community: 165,000 followers on Twitter and a Discord bringing together 22,400 members with a responsive team and almost a hundred messages a day.

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Regulation ⚖

Lido, operating in the staking sector, could attract the interest of the US regulator, which has been examining this activity since mid-2023. Are staking and its rewards similar to financial securities? This question has yet to be decided in the United States.

Staking is not regulated in Europe either. This should be resolved in the next version of the MiCA regulation, as announced by ECB President Christine Lagarde, in mid-2022. Most specialists believe that European regulators have a more open attitude than the United States.

The Lido system is based on the pooling of ethers (ETH) from users all over the world regardless of nationality. Potentially, the assets of American investors can be mixed with those belonging to Iranians or North Koreans.

Like almost all governance tokens, the LDO token does not offer its holders the possibility of receiving income generated by the protocol for regulatory reasons.

The SEC considers that a token that allows income to be received for no consideration is akin to a financial security and should therefore be regulated as such, as it is similar to dividends.

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Governance 🗳

Among the largest LDO holders are US venture capital funds a16z (exact weight unknown but significant) and Paradigm (7%), two other anonymous addresses own 5% each and the team owns around 4%.

The governance quorum, which refers to the minimum percentage of tokens to make a vote, has been set at 5%. This means that the Paradigm fund has the ability to pass its proposals unilaterally in the event of a low turnout. Like almost all DAOs, Lido's is governed by a minority of active participants.

Lido is currently working on a new governance model that would offer a role to stETH holders. This would enable them to exercise a right of veto over proposals put to a vote at the DAO. This initiative aims to strengthen decentralisation and participatory democracy within the network, alleviating concerns about centralisation.

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A centralising protocol? 🤔

Lido has been criticised for the potential risks of centralising the Ethereum network, given that ETHs staked via Lido account for a third of all Ethereum staking. However, these criticisms deserve to be qualified.

Lido relies on a network of 39 separate, independent Ethereum validators, with no single validator holding more than 1.2% of the total ETH staked on Lido. While this system is not perfect - a quarter of these validators are based in the United States and almost half use public cloud servers, making them dependent on hosts such as AWS - it has nonetheless democratised Ethereum staking to as many people as possible and limits the weight of large platforms such as Coinbase (currently 15% of Ethereum staking).

Despite Lido's goodwill in wanting to improve the decentralisation of its node operators, they are still not diverse enough, not least because 75% of them are based on Geth software. It is crucial to use a variety of software to guarantee the continued operation of the network in the event of the failure of one of these systems.

The DAO provides many resources that serve the transparency of the protocol. However, like almost all DAOs, the Lido DAO has only a small number of active contributors who possess very large quantities of LDOs. In fact, the participation rate for each vote is often just over 5% and never more than 8%. In most cases, the top 10 voters account for more than 80% of the LDOs that were counted for the vote.

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Competitors ⚔

Lido holds a dominant position in the liquid staking sector, approaching a monopoly situation. Its most direct competitor, Rocket Pool, manages almost a tenth as many staked ETH and stands out for its ability to allow anyone to become a node operator, unlike Lido, which currently only works with professional operators. Swell, another competitor, shares similarities with Lido and has grown rapidly, not least due to the ability for users to receive an airdrop from its future governance token.

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Roadmap 📒

Lido, being regulated by its DAO, does not have a fixed, detailed roadmap. However, several clear objectives are emerging for the protocol. These include the expansion of stETH and wstETH onto new blockchains, the diversification of partner validators, and the evolution of the governance system to give stETH holders a veto over DAO proposals.

The Lido community is currently working on developing two new modules designed to make the integration of node operators considerably easier. Each module will represent a separate group of operators, with a specific fee distribution structure. At present, only one module exists, grouping together 39 pre-approved validators. The new modules envisaged would offer greater flexibility and allow the network to be expanded to up to 300 node operators.

What the price is saying 📈

The price of LDO is currently below resistance of its all-time highs. A weekly close above $3.3 could be an interesting event for those considering an investment. Assets in price discovery are regularly the focus of investor attention.

LDO's capitalisation stands at $2.8 billion, placing the protocol 32nd in the crypto sector. Within decentralised finance, only Uniswap (UNI) does better ($3.5 billion), but Lido is the leading protocol in terms of TVL ($21 billion).

You can acquire LDO on most major exchange platforms (Binance, Coinbase, Kraken, Bitstamp, Bitpanda, Coinhouse, Swissborg, etc.).

Fans of self-hosted wallets can use LDO on most Ethereum-compatible offerings on the market (MetaMask, Rabby, etc.).