How Lido works

Lido allows users to earn staking rewards without locking assets or maintaining staking infrastructure. Users deposit their PoS assets into Lido's smart contracts and receive stTokens (i.e. stETH) on a 1:1 basis that represent an active balance of the user's staked assets along with any staking rewards accrued or penalties inflicted on validators. Users can withdraw or redeem their stTokens back for their original PoS assets at any time, but must wait for the duration of the unbonding period respective to each PoS chain.

Lido V2 introduces two new components. The first is the ability for stETH holders to directly unstake through the protocol by burning their stETH and exiting at a 1:1 ratio. Lido's withdrawal mechanism has two modes: Turbo and Bunker mode. Turbo is the default mode used unless there is a catastrophic event affecting the Ethereum network. Withdrawals in Turbo mode are fulfilled quickly using all available ETH from user deposits and rewards. The length of time to exit the network is uncertain but can be processed within hours in the best-case scenario. Bunker mode is designed to process withdrawals under catastrophic scenarios in order to prevent sophisticated actors from gaining an unfair advantage by delaying withdrawals across the entire protocol and socializing the negative impact. Users do not receive any staking rewards while in the exit queue. The second major upgrade is the introduction of the Staking Router, a new modular architecture that decentralizes Lido's node operator set to include solo stakers, DAOs, and Distributed Validator Technology (DVT) clusters. The launch of Staking Router shifts the protocol's strategy towards an aggregator role to encompass a more diverse validator set.

How Lido makes money

Lido currently charges a 10% fee on the staking rewards earned by depositors. The exact fee percentage is defined by the DAO and can be changed in the future via governance. This fee is currently distributed evenly between the DAO treasury and paying node operators. Previously, the Lido DAO had directed a portion of the DAO treasury to be used towards the slashing insurance fund. In the case of a slashing event, DAO members can burn an equivalent amount of their stETH shares from the insurance fund to offset this penalty. If the slashing penalty exceeds the amount of the insurance fund, then any excess losses would be socialized across stETH holders.

How you make money on Lido

You can generate additional yield on top of your staking assets by depositing into Lido to participate in the PoS validation mechanism to earn block rewards. The unlocked liquidity with stTokens can also be redeployed within a number of popular DeFi protocols to generate additional yield on top of the staking rewards.