A Beginner’s Guide to Lido Staked ETH (stETH)

Cryptocurrency has revolutionized the financial world, offering new opportunities for investors to grow their wealth. One such opportunity is staking, which allows individuals to earn passive income by participating in the validation process of blockchain networks. Lido Staked ETH (stETH) is a popular staking option for Ethereum, providing a convenient and secure way for beginners to enter the world of staking. In this comprehensive guide, we will explore what Lido Staked ETH is, how it works, and the benefits it offers to investors.

Previously, the investors were required to lock their ETH tokens for a fixed period. It means the investors can’t withdraw their funds even if they need them. However, the Shanghai upgrade has solved this problem to some extent. But the investors still need to stake 32 ETH tokens to participate in the process.

An average retail investor can’t hold such a big amount of ETH tokens. Fortunately, liquidity solutions like Lido are trying to accommodate all types of investors.

Key Takeaways: –

• Lido Staked ETH (stETH) provides a liquid staking option for Ethereum, allowing investors to earn staking rewards while still having the flexibility to use their stETH tokens for various DeFi applications.
• Lido’s approach lowers the entry barrier, enabling both large and small investors to participate in staking without the need for locking a fixed amount of ETH tokens.
• stETH holders can explore various DeFi use cases, including yield farming, liquidity provision, and lending, enhancing their potential for additional rewards and engagement in the DeFi ecosystem.

What is Lido?

Lido Staked ETH, also known as stETH, is a tokenized representation of Ethereum that has been staked on the Ethereum 2.0 network. Ethereum 2.0 is an upgrade to the existing Ethereum network that aims to improve scalability, security, and sustainability. Staking involves locking up a certain amount of cryptocurrency to support the network’s operations and validate transactions. In return, stakers earn rewards in the form of additional cryptocurrency.

The unique thing is that Lido has an independent governance infrastructure that doesn’t affect the performance of other adaptable protocols on the blockchain.

Understanding the Liquid Staking

To understand Lido Staked ETH, it is important to grasp the concept of staking. In traditional proof-of-work blockchain networks like Bitcoin, miners use computational power to solve complex mathematical problems and validate transactions. In Ethereum 2.0, the network transitions to a proof-of-stake consensus mechanism, where validators are chosen to create new blocks based on the amount of cryptocurrency they hold and are willing to “stake” as collateral.

The best part is that the investors can earn additional yield by depositing their stAssets on other DeFi protocols. The stAssets are generated on a 1:1 basis. So, if a user has deposited 5 ETH tokens, he will receive 5 stETH tokens from the platform that they can use for other transactions.

How Does Lido Staked ETH Work?

Lido is a liquid staking platform that lowers the entry barrier allowing anyone to participate in the staking. It also solves the problem of locking tokens by generating stAssets. Lido uses smart contracts to manage withdrawals and deposits. Smart contracts are also used to mint and burn tokens. Similarly, they keep a record of reward distribution.

Lido Staked ETH allows investors to earn block rewards by staking a fraction of ETH or other tokens. Lido mints stETH tokens as soon as the user deposits ETH tokens in Lido’s staking pool. And when a user requests the withdrawal of funds, the smart contracts burn the stETH tokens associated with the request.

The ETH tokens are distributed among validators so they may deposit them on Ethereum’s mainnet to validate blocks. The validators can’t access the funds directly because they’re locked in a smart contract.

The node operators can only validate transactions by using the public validation key. The platform eliminates the risk of single-point failure by distributing the stake assets among multiple validators.

How stETH (Lido Staked ETH) Works?

stETH represents the staked ETH tokens on Lido. The platform generates one stETH (Lido Staked ETH) token for each ETH token staked on the network. The users can use these tokens as collateral in crypto lending platforms or they can sell or spend them on relevant platforms.

Lido uses a socialized staking mechanism to reward the stakers. Therefore, they start receiving staking rewards right from the day when they deposit their funds. So, the users don’t need to wait for their ETH tokens to be added to the queue. The investors can earn additional rewards by depositing stETH tokens in various DeFi platforms.

However, stETH offers lower staking rewards compared to the Ethereum Beacon chain. The difference occurs because only a few Lido validators can make it to the queue whereas the stETH rewards are distributed among all stETH holders. However, the platform will soon overcome this problem by encouraging more validators to stay active.

Lido has an insurance fund, a staking pool, and an Aragon-powered DAO. The platform charges a 10% fee from staking rewards to successfully run its operations.

Use Cases of stETH

Like ETH, stETH can be used in the DeFi ecosystem. The token holders can use it to generate additional rewards.

• Yield Farming – The token holders can deposit their tokens with yield aggregators to earn additional rewards. Yearn Finance and Harvest Finance are popular aggregators that maximize rewards by spreading the assets across a range of platforms including Sushiswap, Curve, and more.
• Liquidity Pools – stETH token holders can provide liquidity to various DeFi platforms like Curve, 1inch, Sushiswap, and Bancor. The stETH token holders can earn LDO tokens and the native tokens of the DeFi protocol by providing liquidity.
• Lending – stETH token holders can also add their tokens to lending platforms to earn interest. Similarly, they can borrow ETH tokens from these platforms by providing stETH tokens as collateral. They can then restake the borrowed ETH tokens to earn additional staking rewards.

Lido Staked ETH Tokenomics

stETH is the native token of the platform that is used to run its operations. The supply of stETH tokens may vary depending on the ETH tokens deposited by the investors. With a circulating supply of 7.8 million tokens, stETH has a market cap of $92 million. It ranks among the 200 best cryptocurrencies in terms of market cap.

Frequently Asked Questions

How is stETH Different from Regular ETH?

stETH (Lido Staked ETH) is a tokenized representation of staked ETH on the Ethereum 2.0 network. It represents the investor’s share of the staked ETH and the rewards generated by the staking process. Regular ETH, on the other hand, is the native cryptocurrency of the Ethereum network and can be freely traded and used for various purposes.

Can I Withdraw my stETH at Any Time?

Yes, stETH can be freely traded and withdrawn at any time. When you want to withdraw your stETH, you can simply convert it back to ETH and transfer it to your wallet.

Is Lido Staked ETH a safe investment?

Lido Staked ETH is generally considered a safe investment, but it is important to understand the risks involved. While Lido has implemented various security measures, there is always the risk of smart contract vulnerabilities or hacks. Additionally, the value of stETH tokens can be impacted by slashing events or market fluctuations.

Can I earn passive income with Lido Staked ETH?

Yes, staking ETH with Lido allows you to earn passive income in the form of additional ETH rewards. The exact amount of rewards will depend on various factors, including the amount of ETH staked and the overall network participation.

Conclusion

Lido Staked ETH (stETH) offers a liquid and accessible solution to Ethereum staking, allowing investors to earn rewards while maintaining flexibility. With a decentralized governance system and diverse DeFi use cases, stETH presents a promising option for crypto investors seeking passive income opportunities in the evolving blockchain landscape.

Feel free to get in touch with us if you need more information about how Lido Staked ETH works. We also invite you to subscribe to our weekly newsletter if you need regular updates about Bitcoin and the crypto market.