From messari by Toe Bautista

Key Insights

Primer

Lido (LDO) is a liquid staking solution for Ethereum and Polygon. Their contracts allow users to deposit native staking into the protocol and receive a staked derivative asset in return (e.g. stETH). Liquid staking derivatives provided by Lido can be exchanged one-to-one with the protocol for the underlying staked asset or sold on the open market where they generally trade at parity with the base asset. This system allows users to earn staking yields without the extensive investment required to run a node or the need to commit their assets to protocol-enforced lock-ups.

Lido charges a fee on the staking yield, around 10%, which is deducted before the remaining yield is distributed to holders of staked assets (stAsset). This protocol fee is typically divided equally between the validators supporting the network and the Lido treasury, helping to sustain the ecosystem and fund further development. Lido DAO, a decentralized autonomous organization controlled by ERC-20 LDO tokenholders, governs the project.

Staked Ethereum (stETH) allows Ethereum holders to participate in network security via staking while retaining liquidity for various DeFi opportunities. This dual benefit addresses a significant barrier in traditional staking – illiquidity. Users enhance their capital efficiency while enabling greater participation in the staking process.

The growing popularity of stETH can be attributed to its ability to integrate seamlessly into the broader DeFi ecosystem. Many DeFi platforms (e.g., DEXs, borrow/lend protocols, etc.) have incorporated stETH, which is, in turn, proving to be a desirable medium of exchange throughout Ethereum.

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Key Metrics

Performance Analysis

Financial Overview

Network Overview

Lido's Total Value Locked (TVL) increased by 67% QoQ, reaching $35.5 billion, continuing as the largest application in crypto by TVL. Q1 2024 also had Lido’s largest nominal growth of $14 billion. In ETH terms, TVL increased 5.22% from 9.2 million to 9.69 million and marks the seventh consecutive quarter of positive TVL growth. ETH price rose 60% QoQ, underscoring much of the dollar value TVL growth. Lido’s TVL has grown from over $5 billion to $35 billion since the start of 2023, and its circulating market cap has grown 300% to $2.3 billion. Liquid restaking protocols such as EtherFi, Renzo, and others offer additional points for staking ETH and further catalyzed growth in the sector. Liquid restaking currently comprises $10 billion worth of TVL.

LDO grew 12.3% QoQ to a circulating market cap of $2.5 billion with a price of $2.91. It reached its all-time high in market cap at $3.3 billion in January. The token supply is fully circulating.

Lido's revenue reached an all-time high of $28 million in Q1 2024, growing 46% QoQ. Its gross staking rewards were $287 million, of which Lido receives 10% and allocates the remaining 90% to ETH stakers on the protocol. Lido's 10% fee is evenly divided between node operators and the DAO treasury, resulting in a 50/50 split. Liquidity and operating expenses grew from over $10 million in Q4 to $13.5 million in Q1. Liquidity expenses were traditionally distributed exclusively in LDO until a decision made on June 1, 2023, allowed the reWARDS committee to distribute them in stETH or wstETH. Historically, all expenses related to LDO, including liquidity rewards, were recorded at historical cost.

Regarding grant funding, any grants issued to LEGO or external entities not controlled by token holders are recorded as expenses. This accounting practice can lead to months with unusually high or low expenses, but these fluctuations typically even out over 12 months. Lido’s net profit margin grew from -$1.12 million to -$0.19 million in Q1, indicating an enhanced revenue stream despite higher operating costs.

One aspect of the higher revenue stream results from increasing Ethereum deposits. Over 3.15 million ETH was deposited into Lido in Q1, an increase of 79% QoQ. Lido seldom sees net outflows, and Q1 was its highest net deposit quarter since Q3 2023. As a result, its treasury balance rose 13.3% to $5.24 million.

Since the beginning of 2023, Ethereum's staking ratio has seen consistent growth, reaching 27% by the end of Q1 2024, up from 24% at the start of the quarter. Lido's TVL saw a modest increase of 3%, while its staking share dropped by 2% to 30%. The largest beneficiaries of staking growth were the new liquid restaking protocols—notably, Ether.Fi, the leading liquid restaking protocol, added 900,000 ETH to its TVL, accounting for nearly one-third of the total growth in staking for the quarter. Lido holds an 87% market share among liquid staking protocols, with Rocket Pool trailing at 7%. With consistently higher yields and deeper liquidity, stETH remains the DeFi-staked asset of choice.

stETH yields, averaging around 3.5% for Q1 2024, consistently outperformed Coinbase’s (cbETH) and Rocket Pool’s (rETH) yields. Protocol APR refers to the gross annual percentage rate, which is the total rewards received by Lido validators from both the Consensus Layer and Execution Layer relative to the total pooled ETH. This rate is estimated as a moving average of the last 7 days. Similarly, EtherFi’s eETH APY of 3.04% trails stETH by 16%. Users staking ETH with Lido start receiving daily rewards from day one, credited as stETH balance rebases. Lido's rewards are socialized across all stakers; meaning rebases apply to all stETH holders, even if their ETH has not yet been deposited into the queue.

The distribution of Execution Layer (EL) clients connected to validators under the Lido protocol as of the end of Q1 2024 shows ongoing efforts to improve EL client diversity. The steady progress since the Merge in Q2 2022 evidences this. Geth remains the leading client but has decreased to 46% usage from 85% last year. Nethermind's adoption has risen to 34%, and Besu now accounts for 14.6%. Erigon's share also increased, highlighting a continued effort by Node Operators to diversify their infrastructure in response to community concerns about supermajority risks.

The stake distribution among node operators is well-balanced, with a Gini coefficient of 0.104. This indicates a decrease in inequality this quarter due to the onboarding of six new node operators and their increasing stake shares.

Compared to the Ethereum network at large and amongst other node operators, stETH has a materially more diverse client set. Considering stETH’s TVL, improvements to client diversity in stETH have materially diversified the Ethereum network.

Key Developments

In May, Lido announced that its first batch of Simple DVT (Distributed Validator Technology) validators were active. The original proposal, launched last October, outlined the addition of a "Simple DVT" module to the Lido protocol, employing DVT through Obol Network and SSV Network to enhance the resilience, security, and decentralization of Ethereum staking.

It enables ETH stakers to retain custody of their funds while selecting operators to create and manage to validate key shares. DVT is advantageous for both groups of operators working together—such as home validators or staking services—and individual operators seeking to add redundancy to their setups. In both scenarios, the validator's private key is split across multiple machines and does not need to be online for signing or even fully assembled, which safeguards it against theft.

This redundancy allows operators to conduct system maintenance without downtime risks. DVT creates a cooperative, multi-party system for validators, distributing the operational duties across multiple node operators. This setup enhances validator resilience by mitigating single points of failure and reducing downtime risks and promotes broader decentralization across infrastructure, geographic locations, and client diversity. Furthermore, using Distributed Key Generation (DKG) in DVT adds an additional layer of security against external threats.

The Simple DVT Module (sDVTm), implemented following a record-setting Aragon vote in February 2024, is the second mainnet module of the Lido protocol. This module marks the first time solo and community stakers can participate in validator operations within the Lido framework, utilizing the foundational architecture of the Curated Operator Module and incorporating DVT solutions from Obol and SSV Network. Initially, the sDVTm is limited to 0.5% of total Lido stakes, with provisions for expansion through a DAO vote, aiming to integrate 250 new Node Operators into the system.

Selected node clusters, the first of which went live in May, will be onboarded to Ethereum's mainnet. The Node Operator Subgovernance Group oversees this process, proposing viable clusters for DAO approval. Should these distributed validators meet or exceed performance benchmarks comparable to the broader network, the scope of the Simple DVT module could expand, allowing for additional validators per cluster.

The Simple DVT Module has undergone extensive testing throughout its development, surpassing all minimum performance benchmarks in the third Obol testnet. This led to the mainnet onboarding of the first cohort of 12 clusters. Additionally, the SSV Network's third testnet is nearing completion, promising further enhancements and integrations based on its outcomes. The module allows multiple node operators to manage separate nodes to achieve consensus and fulfill validator duties collectively.

Key Events

Outside of its DVT validators launch, Lido underwent several key governance proposals. In January, they executed replacing Jump Crypto with ChainLayer in the Lido on Ethereum Oracle set. Additionally, they deactivated node operators Jump Crypto and Anyblock Analytics from the Curated Node Operators Registry as both were inactive in Q4 2023. The governance also saw the addition of stETH factories to facilitate funding for Lido Contributors Group multisigs (RCC, PML, and ATC) in stETH via the Easy Track mechanism.

Another significant upgrade involves allowing Easy Track setups to enable funding in DAI, USDT, and USDC, a change audited by Oxorio. This upgrade includes granting transfer capabilities for USDT and USDC with a single transfer limit of 2M, in addition to current permissions. Lastly, Lido governance decreased the Easy Track limit for the TRP multisig as recommended by the TRP committee. These measures aim to streamline processes and expand funding capabilities within the Lido protocol.

In March, proposals executed incorporate Easy Track or Aragon votes for token transferring within Lido’s treasury. Specifically, the first item proposes adding a Factory for swapping stETH to stablecoins, and the second item involves adding a Factory for stablecoin swaps, including DAI, USDC, and USDT. These factories can transfer funds to Stonks Contracts, which Ackee has audited. The trusted caller role for these contracts will be granted to the TMC (Treasury Management Committee) multisig. Once the Stonks Contracts receive the tokens, they configure the setup necessary to initiate CoW swap orders. Subsequently, a swap order can be created via the Easy Track user interface, ensuring the Treasury's minimum expected return is met.

stETH Utilization

One of Lido's major value adds is liquidity, which enables stETH to be used as collateral. The popularity and utility of stETH in DeFi are evident in its adoption rates and integrations across various DeFi platforms. For example, stETH can be used as collateral in lending protocols, traded on decentralized exchanges, or utilized in yield farming strategies, enabling users to compound their earnings by leveraging staking rewards in other DeFi activities.

On DEXs, over $150 million of stETH was routinely traded daily across all of DeFi in Q1, a noticeable increase from past quarters. Ethereum Beacon Chain continues to be the primary network for activity, accounting for more than 87% of all volume. Arbitrum comprises 8%, and Base accounts for 1% of total stETH trading volume.

Throughout most of the quarter, the 2% depth for stETH on DEXs maintained around $100 million, meaning trades of up to $100 million won’t affect the price by more than 2%. Native ETH, on the other hand, remains the dominant asset on DEXs, trading in 4 of the top 5 pools on Uniswap. As of March, trading volumes for stETH increased significantly on both DEXs and CEXs, consistently trading over $80 million in daily volume on centralized exchanges and over $200 million daily volume in DeFi, driven by increased utilization of stETH and rising ETH prices. One prominent example comes from Bybit, which recently increased stETH collateral ratios, driving a marked increase in exchange volumes and further improvement. The current 2% depth on Bybit, the leading CEX for stETH, is approximately $1.7 million. Global 2% orderbook depth sits around $10 million.

For onchain lending markets, however, stETH is the preeminent form of collateral. Due to the rebasing nature of stETH, holders' balances change daily as new oracle messages are processed. While rebasable tokens are increasingly common in DeFi, dApps like Maker, Uniswap, and SushiSwap do not support them. To address compatibility issues with these dApps, Lido offers an alternative form of its staked tokens called wstETH (wrapped staked ether), which maintains a static balance and can be easily exchanged for stETH.

wstETH is the largest asset in Aave V3 and comprises 50% of deposits. This embodies a noteworthy shift in DeFi lending as users opt for LSTs instead of native ETH as their desired currency. This is a notable increase from Q4, when wstETH accounted for only 33% of Aave V3 deposits, while ETH made up about 19%. Currently, wETH constitutes just 5% of deposits, indicating a clear trend of users favoring wstETH over ETH as collateral.

Furthermore, stETH can be exchanged 1:1 for ETH directly or on exchanges, helping cement risk tradeoffs in exchange for additional yield. Over 3 million stETH are employed throughout DeFi. Lending accounts for 85% of all stETH in DeFi. Liquid restaking comprises most of ‘Other’ in the above chart, further underscoring the sector's prominence.

On the institutional front, stETH receiving regulatory clarity from FINMA on staking echoes a marked shift in sentiment. For direct staking, where institutions control staking and withdrawal keys themselves, the segregation required under the Banking Act does not apply, and certain capital requirements may be waived temporarily, provided that institutions meet conditions like clear risk disclosure and operational risk control measures. This guidance from FINMA marks a significant step towards integrating staked assets into the regulatory framework, which previously discouraged the utilization of stETH.

The increased clarity allows institutions such as Taurus to partake in this adoption. Currently, Lido’s stETH, is restricted to Swiss-based, FINMA-regulated banks in partnership with Taurus, a firm that collaborates with major banks like Deutsche Bank and Santander.

This partnership aims to merge digital assets with traditional finance and expresses the growing demand among banks for such staking services. The collaboration directly results from FINMA's guidance on staking crypto assets, hinting at a possible broader adoption across European jurisdictions. Funds locked up in staking must always be accessible to clients, a requirement that liquid staking satisfies by allowing the tokens to be exchanged one-to-one with ETH. This regulatory clarity allows banks to engage in staking solutions like Lido.

Furthermore, Taurus's relationship with big financial players deepened following Deutsche Bank's investment in a $65 million Series B funding round led by Credit Suisse, which also saw participation from Arab Bank Switzerland and Pictet Group. This backing supports Taurus's mission to integrate liquid staking within the banking sector, facilitating the adoption of stETH.

With the surge in institutional adoption of stETH, many other prominent market participants expect similar adoption patterns of stETH as collateral across custody and exchange platforms, which aligns with its rise in DeFi lending markets. The rationale is simple, and it was highlighted in a mainstage panel at DAS London: collateral efficiency is important to institutions for many reasons, and stETH is well positioned to serve this role.

Closing Summary

Lido's stETH has cemented its status as a cornerstone asset in DeFi, displaying similar patterns on CEXs and within institutions. In Q1, stETH's trading volume on DEXs routinely surpassed $150 million daily, showcasing an increase from previous quarters and highlighting its growing integration into various DeFi platforms.

The adoption of stETH extends beyond trading, as it's increasingly preferred as collateral on centralized exchanges and major lending protocols such as Aave V3, where wstETH now comprises 50% of all deposits, marking a shift from the traditional use of ETH. This trend reflects a preference for liquid staking tokens due to their yield-bearing properties. As Lido continues to innovate with developments like Distributed Validator Technology (DVT), its role in enhancing the security and decentralization of Ethereum staking becomes increasingly vital, promising to further entrench stETH's utility and acceptance across the DeFi ecosystem.