The Ethereum network is undergoing a significant transition from Proof of Work (PoW) to Proof of Stake (PoS). With the arrival of Ethereum 2.0, stakers will replace miners as the validators securing the network. For over a year, users have been able to stake ETH on the Ethereum Beacon Chain to earn rewards. However, independent staking requires a minimum of 32 ETH and locks funds for an extended period, leading to the emergence of various staking service providers.
On March 4, venture capital giant Andreessen Horowitz (a16z) invested $70 million in Lido Finance, a leading decentralized Ethereum staking solution. This marked the protocol's second major funding round within a year, following a $73 million raise in May of the previous year. Lido's interface is straightforward: users connect their wallet, stake any amount of ETH, and begin earning daily rewards.
While major centralized exchanges like Binance and other DeFi protocols offer similar services, Lido has managed to attract significant capital investment. According to a16z, a key factor is Lido's "trustless" nature. This DeFi protocol leverages a DAO for fund management and community voting to select validator nodes, while using audited smart contracts to mitigate centralized security risks.
Additionally, users who stake ETH with Lido receive stETH, a liquid staking token. This token can not only be redeemed for ETH but also used as collateral in other DeFi protocols to generate additional yield. Compared to centralized staking providers, Lido offers advantages in transparency and potential returns. As PoS blockchains become more prevalent in the crypto space, decentralized staking protocols are expected to see increased adoption. For these protocols, ensuring code security and the safety of user assets remains the top priority.
The Rise of Ethereum Staking and Lido's Role
Ethereum's upgrade to a Proof of Stake consensus mechanism, expected in the summer, represents a fundamental shift. This move eliminates the "computational power" model of PoW, allowing users to temporarily deposit or stake ETH to become network validators. These validators are responsible for verifying transactions and, in return, earn rewards.
The Ethereum Foundation launched the Beacon Chain staking contract in November 2020, enabling users to stake a minimum of 32 ETH to earn inflationary rewards. A key point to note is that this contract does not yet permit withdrawals, meaning staked ETH is locked for the foreseeable future. In the PoS mechanism, more staked ETH and more stakers mean more validator nodes, which enhances network security. Staking is, therefore, the critical backbone of Ethereum 2.0's operation.
Data from on-chain analytics providers shows that over 9.83 million ETH had been locked in the Beacon Chain contract by early March. Not all of this is from individual 32-ETH stakers. The emergence of both centralized and decentralized staking solutions has significantly lowered the capital barrier to entry. Lido Finance has become a prominent representative in the decentralized staking sector.
Its recent $70 million investment from a16z comes less than a year after a $73 million round led by Paradigm, with participation from Coinbase Ventures and Three Arrows Capital. Raising over $140 million in under a year is a notable achievement within the entire cryptocurrency industry. Lido's official Twitter account stated that a16z aligns with the community's commitment to decentralization and making Ethereum staking simple and secure, adding that the firm fully supports Lido's roadmap towards a fully trustless staking solution.
Furthermore, a16z has staked a portion of its own ETH holdings with Lido, recognizing that the protocol removes significant operational complexity for institutional investors. 👉 Explore advanced staking strategies
How Lido's Decentralized Model Works
In the often complex world of DeFi, Lido’s user interface and underlying logic are remarkably simple. Visiting its website and clicking the stake button reveals a clean interface. Users connect their wallet, see the current estimated annual yield (e.g., 4.4%), and the anticipated transaction fee (e.g., ~$9.02) before staking their ETH. Upon staking, users begin earning daily rewards.
Crucially, Lido does not enforce the 32 ETH minimum requirement. After staking, users receive stETH, a liquid staking token, on a 1:1 basis against their staked ETH. This token is the primary vehicle for Lido's solution to the liquidity problem inherent in locked staking. On the surface, the functional service provided by Lido appears similar to that offered by large centralized exchanges. So why has such a seemingly simple protocol attracted massive investments from top-tier venture firms?
Key Advantages: Trustlessness and Enhanced Yield
While the core service is similar, centralized and decentralized staking services differ greatly in transparency and potential yield. Large exchanges can easily create an ETH staking pool. Companies like Binance, Kraken, and Coinbase pool user assets to bypass the 32 ETH minimum and handle the burden of running validator nodes. They also often provide liquidity services, allowing users to effectively "unstake" early.
In this model, the user is not involved in, and has no visibility into, the intermediate steps. While this simplifies the process, it creates a significant lack of transparency. Users cannot verify if their ETH has actually been staked or, if it has, which validator node is responsible.
Staking on the Ethereum Beacon Chain requires not only capital but also technical expertise and expensive, reliable infrastructure. Validator nodes require professional equipment and must maintain near-constant uptime. Poor management can trigger Ethereum's "slashing" condition, a penalty mechanism that can lead to loss of staked principal.
Typically, large exchanges custody user-staked ETH with partnered validator nodes. However, exchanges rarely disclose this information. Users do not know who is validating their assets or the competency of those validators, creating inherent risk. Furthermore, centralized staking providers carry the theoretical, albeit often mitigated, risk of misappropriating user assets—a risk that is structurally absent in a properly designed decentralized solution.
Lido addresses these transparency issues by leveraging a DAO and audited smart contracts to democratize decision-making and mitigate centralized risk. The protocol only works with professional staking enterprises like P2P.org, Chorus One, or Stakefish. Most importantly, which nodes are selected must be approved by the Lido DAO through community governance votes. Each validator also has a maximum stake limit, which is also governed by vote.
This means Lido's community users have a democratic say in selecting validators. The protocol also supports distributing stake across multiple validators to minimize risk. For security, Lido has open-sourced its code for continuous public review, and its smart contracts have been audited by firms like Quantstamp and MixBytes. It uses non-custodial staking to eliminate counterparty risk; user ETH is not directly custodied with a node but is managed via smart contract authorization. Since user funds are controlled by the DAO, staking service providers never have direct access to them.
This "trustless" design was clearly a major factor in a16z's investment decision. The venture firm stated on its website that Lido provides the simplest way to stake ETH and other PoS assets while striving for decentralization and democratic governance through its DAO, noting it was "impressed by Lido community’s steadfast commitment to decentralization."
From a yield perspective, the existence of the stETH token expands the potential returns for users. stETH can not only be traded for ETH on decentralized exchanges but also used as collateral within various DeFi lending and yield farming protocols. This allows users to earn staking rewards while simultaneously generating additional yield on the same capital.
Lido is also expanding its services beyond Ethereum. The protocol has already developed specialized staking solutions for other PoS blockchains like Terra, Solana, and Kusama, allowing users to stake these chains' native assets for rewards. Compared to centralized staking providers, Lido's advantages in transparency, security, and yield potential are clear value propositions that appeal to capital investors. 👉 Get insights on multi-chain staking
When compared to other decentralized staking solutions, Lido has also gained significant user traction. According to data from Staking Rewards, Lido Finance's total value locked (TVL) exceeds $518 million, far surpassing other DeFi protocols like Cream Finance. As PoS blockchains continue to become the mainstream in crypto, the demand for robust staking solutions will only grow, which likely contributed to a16z's timing. For decentralized protocols like Lido, the influx of more capital presents an ongoing challenge: continuously ensuring code security and the absolute safety of user assets.
Frequently Asked Questions
What is liquid staking?
Liquid staking solves the problem of locked capital in traditional staking. When you stake assets through a protocol like Lido, you receive a liquid token (e.g., stETH) that represents your staked holding. This token continues to accrue staking rewards but remains liquid and can be traded or used in other DeFi applications.
How does Lido choose its validator nodes?
Validator node selection is managed democratically by the Lido DAO, which is composed of LDO token holders. The community votes to approve professional staking entities as node operators. This governance model ensures transparency and decentralization, as the community decides who is trusted to validate the network.
Is staking with Lido safer than using a centralized exchange?
While no solution is without risk, Lido's non-custodial, audited smart contract model and decentralized governance reduce specific risks associated with centralized providers, such as fund misappropriation and opaque operations. However, users must still consider smart contract risk, which is why ongoing audits and open-source code are critical.
What can I do with stETH?
The stETH token is versatile. You can hold it to earn staking rewards, trade it on supported decentralized exchanges for other cryptocurrencies, or use it as collateral to borrow assets or participate in yield farming strategies within the broader DeFi ecosystem, potentially compounding your returns.
What happens when Ethereum allows staked ETH withdrawals?
Lido has a roadmap to support withdrawals once they are enabled on the Ethereum network. Users will be able to burn their stETH tokens through Lido's smart contracts to redeem the underlying ETH. The protocol is designed to be upgradable via DAO governance to adapt to these network changes.
Does Lido only support Ethereum staking?
No, Lido is a multi-chain staking protocol. It currently offers liquid staking services for several other Proof-of-Stake blockchains, including Terra (LUNA), Solana (SOL), and Kusama (KSM), with plans to potentially integrate more chains in the future.