The liquidity of staked assets

Lido was established in 2020 to solve a fundamental friction in the Ethereum transition to Proof of Stake: the illiquidity of staked capital. Under the original Ethereum staking design, users had to lock up 32 ETH in a validator and run their own hardware, with no ability to withdraw those funds for an indefinite period. Lido introduced a protocol that pools user deposits and distributes them to professional node operators. In return, users receive stETH, a token that represents their stake. This token is liquid, meaning it can be sold, traded, or used as collateral in other financial applications while the underlying ETH earns staking rewards.

Mechanics and the stETH token

The core of the protocol is the stETH token. It is a rebasing token, meaning its balance in a user's wallet increases daily as staking rewards are distributed. This mechanism eliminates the need for users to manually claim rewards or manage validator uptime. Because stETH maintains a value roughly equal to the price of ETH, it has become a central piece of collateral in decentralized finance. It is integrated into lending protocols like Aave and stablecoin systems like MakerDAO, where users borrow against their staked assets. This composability is Lido's most significant market advantage. By having the deepest liquidity, stETH is easier to trade in large volumes compared to its competitors, which reduces the risk of price de-pegging during market volatility.

Governance by the Lido DAO

Lido is not a traditional corporation but a Decentralized Autonomous Organization (DAO). The Lido DAO is responsible for managing the protocol's parameters, such as setting the fee (currently 10% of rewards) and selecting the node operators who actually run the validators. This governance is handled through the LDO token, which allows holders to vote on proposals. The DAO Treasury receives a portion of the protocol fees to fund development and security audits. Over $4M has been invested in security to date, reflecting the high stakes of managing over $19 billion in Total Value Locked (TVL). This structure is intended to prevent a single point of failure or control, though the concentration of ETH in one protocol remains a topic of active discussion within the broader Ethereum community.

Institutional and modular evolution

The protocol has recently expanded its scope through the introduction of stVaults and the EarnETH vault. These products are designed for institutional users and sophisticated DeFi participants who require more granular control over their staking strategies. Lido V3 introduced a modular architecture that allows different types of node operators to join the network. This includes the Community Staking Module and the use of Distributed Validator Technology (DVT), which aims to further decentralize the validator set by allowing multiple parties to share the responsibility of running a single node. These technical updates reflect a shift from a curated set of professional operators to a more open and resilient infrastructure.