How Lido raises the stakes for crypto and DeFi investors

The world’s most-used blockchain, Ethereum, is switching to a new validation system this summer called proof-of-stake (PoS). PoS, favored over its predecessor for its relative energy efficiency, lets users validate transactions on the network by temporarily depositing, or staking, a certain amount of their tokens in return for rewards.

But ETH holders have been hesitant to stake their coins, with only 8% of eligible tokens in the Ethereum ecosystem staked to date, according to StakingRewards. Still, Ethereum must encourage staking so it can complete the transition to PoS with an adequately secure network.

This incentive gap has created an opportunity for liquid staking providers, including Lido, which announced today that it received a $70 million investment from Andreessen Horowitz.

Lido is the market leader for Ethereum liquid staking, representing over 80% of market share in that space, recent estimates show. Assets staked on Lido are worth over $10 billion USD at today’s prices, and are split across 76,000 individual crypto wallets, Lido co-founder Konstantin Lomashuk told TechCrunch in an interview.

To understand why assets on Lido grew by 15,000% in 2021, according to Lomashuk, it’s important to first understand why some crypto holders do not choose to stake their coins.

First, staking is considered to be less risky, and therefore less lucrative from a return standpoint, than investing in some decentralized finance (DeFi) products. What’s more, staked ETH is effectively “locked up” and cannot currently be withdrawn, making higher-return DeFi strategies look all the more attractive to many yield-seekers.

Second, if a user wants to stake their ETH today, they would either need to put up a minimum of 32 ETH (worth more than US$93,000 in today’s terms) or rely on a centralized exchange like Coinbase or Binance to pool their coins with those of other users. And we know crypto users, particularly early adopters, would much rather use decentralized networks than rely on a middleman to execute transactions.

Lido aims to solve both of these issues through its decentralized staking platform that allows users to stake their coins with no minimum investment required, Lomashuk said.

Lido users can use their staked ETH as collateral to participate in DeFi protocols — meaning they no longer have to choose between staking their ETH and earning attractive DeFi returns, Lomashuk said. The platform does this by issuing a derivative financial product native to Ethereum, which Lomashuk compared to a “new type of bond.”

The platform also supports liquid staking on the Solana, Kusama and Terra blockchains and plans to launch on Polygon later this month, Lomashuk said. Staking on each of these chains has its own unique complexities, requiring Lido to write entirely new code every time it onboards a new protocol, he added.

A decentralized autonomous organization (DAO) governs Lido, a structure that allows the group to remove individual staking minimums for users by pooling their assets. The DAO had 90 voting members last year, all holders of Lido’s governance token, who collectively act as Lido’s decision-making entity.

“There are a lot of decisions going through the DAO, even small ones, like to onboard a new validator or to stake more assets on that validator. Big decisions [also go through the DAO], for example, redistributing Lido tokens or adding some incentives to the tokens,” Lomashuk said.

The DAO structure was crucial for Lido to achieve product-market fit because it was the only way the group could build trust among its community, according to Lomashuk. Executives of the company officially report to the DAO itself rather than to a particular corporate manager or leader, he added.

Around 60 people work full-time on Lido, though the project has closer to 100 contributors in total, including part-timers, Lomashuk said.

Andreessen Horowitz made the investment in Lido partially using ETH, buying up some of Lido’s governance tokens from other holders, Lomashuk said. In conjunction with backing Lido, the venture firm also staked a portion of its own crypto holdings on the Lido platform, according to the company.