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What is Lido Finance? | Complete Beginner's Guide 2022

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Did you know that a third of all the eth being staked on Ethereum's beacon chain is coming from a single protocol. This protocol is Lido finance, and though there have been many concerns about its massive ETH stake, there's much more to this crypto project than meets the eye. Today, I'm going to tell you everything you need to know about Lido finance and why it could have huge implications. For not just Ethereum, but potentially every proof of stake cryptocurrency on the market.I need to give you a disclaimer before I talk about LIDO Finance. I am not a financial advisor , I'm just an educator and this blog post is written with the sole purpose of providing you factual information. Please contact a financial advisor if your portfolio has been killed. If you're new here, you might be feeling a little bit lost right  My name is "MrCrypt "and I am your crypto geek here at the cryptolibrarynow . I pass on the knowledge of cryptocurrencies, exchanges, DeFi, protocols, NFT'S and market analysis are just a few of the topics I tackle on the daily basis. Now enough with the intro. Let's get it on , Let's unpack "What's Up" Lido Finance....

Lido Finance Founders -:

Lido Finance was founded in October 2020 by Konstantin Lomashuk, Vasisliy Shapovalov, and Jordan Fish. konstantin holds a doctorate degree in finance and has worked in crypto since 2015, most notably as the founder of Peter P Validator, a company that runs validator nodes on various proof of stake blockchains. konstantin bought his first Bitcoin in 2014, participated in the Ethereum ICO later that year, and has apparently never sold his BTC, ETH, nor any of the other cryptocurrencies he's purchased since then. As a result of these diamond hands, konstantin estimates he is up between 10,000 and 50,000X on his crypto portfolio and he says his secret is to focus on projects with visionary founders. Take note. Vasisliy Shapovalov holds a bachelor's degree in mathematics and spent nearly a decade working as a software engineer before switching to crypto in 2019. In 2020, Vasisliy became the chief technology officer of Peter P Validator and one of his first tasks was to build a third party staking solution for Ethereum's upcoming Beacon Chain. This third party staking solution eventually became Lido Finance, and Vasisliy continues to serve as the projects de facto technical lead. Now, while the name Jordan Fish might not sound all that familiar, if you're into crypto and active on Twitter you probably follow him without even knowing. That's because Jordan is Kobe, formerly crypto Cobain, a popular crypto influencer, podcaster and writer with close on 700,000 Twitter followers and counting. His sub stack is also well worth checking out too. Jordan has been in crypto since 2012 and in a recent 4 hour long interview he explained that he invested $500 into Bitcoin at the beginning and basically hasn't invested since. It's all been recycled gains. Nice. Jordan holds a Bachelors in computer science and Crypto was a side hustle for most of his career, which he spent working mostly in marketing, namely for Monzo Bank, one of the first online banks  in the UK. Interestingly, Jordan was briefly the CEO of P2P Validator, and he insists that he was the quote sprinkle on top for Lido, finance, with konstantin and Vasisliy being the quote brains of the operation. Even so, Jordan is the author of the Medium post announcing Lido Finance in October 2020, and it seems his role was to attract attention and investors to the project when it was first getting started. Jordan left Lido Finance in early 2021, presumably to focus on the aptly titled Crypto Podcast "Up Only" , which began in February 2021 and which he Co hosts with Brian kross-guard AKA Ledger. Again, highly recommended. Now, according to Crunchbase and the privacy policy on the Lido Finance website, the protocol itself was built by a software company registered in the Cayman Islands called DEFI Limited, though Lido Finance has since become a decentralized autonomous organization with no single entity behind it.

What is Lido Finance ?

So what exactly is Lido finance and how does it work? Well, Lido Finance is a liquid staking protocol. In plain English, it lets you stake proof of stake cryptocurrencies. Without having to lock them up, meaning you can trade them freely while still staking. The short explanation of how this works is that when you stake your cryptocurrency through Lido finance, the protocol gives you a tradable token that acts as a sort of receipt for the crypto you staked. So in the case of Ethereum, when you stake ETH on the Beacon chain through Lido Finance, the protocol gives you a token called staked ETH or steth which mirrors the price of ETH and can be freely traded now steth, maintains its price peg in three ways. The first is through arbitrage, wherein rational traders buy steth when it drops below the price of ETH, since it can be redeemed for actual ETH in the future. The second way steth maintains its peg is through liquidity mining, wherein the Lido Dao provides additional rewards to anyone, providing liquidity for trading pairs between eth and steth. The third way steth maintains its peg is through the organic demand steth. Since Steth earns staking rewards in real time, it's the ideal collateral for borrowing protocols like Ave and make a dao However, the fact that Steth earns staking rewards in real time means its value changes, and this makes it incompatible with certain defi protocols, namely decentralized exchanges like unit swap. This is why there's a second steth token called wrapped steth or wsteth, which essentially makes it possible for your steth  to continue increasing in value while maintaining a fixed price for Dex trading. Besides Ethereums, beacon chain Lido Finance currently supports Solana, Kusama, and Polygon. It's also in the process of adding support for polka dot. Now, as I mentioned in the introduction, Lido Finance is staking around a third of all the ETH on Ethereum's beacon chain, and amount that's worth well over $8 billion. This is for a few reasons. First, becoming a validator on Ethereum's beacon chain requires 32 ETH, which most people can't afford, and delegation is technically not possible. Second, becoming a validator on Ethereum's beacon chain requires technical knowledge as well as 24/7 monitoring, because validators risk losing some of their eth if they go offline or fail to upgrade on time and third, becoming a validator on Ethereum's beacon chain requires locking up, the aforementioned death, until Ethereum completes its transition from proof of work to proof of stake. Even then, withdrawals of staked ETH may not be allowed right away, and in a recent interview, Ethereum enthusiast Anthony Sassano revealed validators may be stuck waiting for six months. It should come as no surprise then that so much ETH is being staked in a liquid way and why the demand for liquid staking is much higher for Ethereum compared to other proof of stake cryptos. If you're wondering why everyone is flocking to Lido Finance for liquid staking as opposed to, say, centralized exchanges, it all has to do with convenience and security. For starters, liquid staking on Lido Finance doesn't require KYC, and the protocol is therefore accessible to anyone with an Internet connection, save for a few exceptions. More about that later. When you stake ETH through Lido Finance, a set of audited smart contracts automatically distributes this eth to a set of 22 validators on Ethereum's beacon chain that were vetted by a lido Dao. Now, it's important to note that the Lido community is actively onboarding new Beacon chain validators. This is why Lido finance having a third of all the ETH staked isn't necessarily A cause for concern. As a reward for sharing their staking infrastructure, these beacon chain validators earn 5% of the staking rewards from all the ETH that's being delegated to them by Lido Finance. Another 5% of the staking rewards go to the Lido Dao Treasury, which can be used for grants for new Lido finance deployments or even protocol insurance if a Lido finance affiliated validator is slashed. The remaining 90% goes to steth holders, hence why staking rewards for ETH on Lido finance are 4% versus the 4.4% that you get if you stake directly on the Beacon chain on that node.

LDO ICO and Tokenomics -:

Lido finance officially launched after the establishment of Ethereum's beacon chain in December 2020 and the following January the LDO token was officially introduced? LDO is an ERC 20 token on the Ethereum blockchain with a maximum supply of 1 billion, the entirety of which was minted at Genesis. LDO's use cases are currently limited to voting in the Lido down. Now, as per the blog post announcing the LDO token, around 36% of its supply went to the Lido Dao Treasury. Around 22% went to investors. 6.5% went to early validators and signature holders, more about them later. 20% went to the early developers of Lido Finance and 15% went to the founders and future employees. As per an article about the LDO token on Lido Finances website quote, initial contributors to Lido have a one year lock followed by a one year vesting. The one year lock ends in December 2021. Logically, this means LDO tokens will finish vesting in December this year, save for those belonging to the Lido Dao Treasury, as their remission schedule is determined by Community vote. In terms of investors, Lido Finance has seen three funding rounds so far, according to Masari. The first funding round was in December 2020 and it raised $2 million from various crypto VCs as well as prolific crypto personalities such as the founders of Aavee and Synthetics. The second funding round for Lido Finance took place in March this year and it raised $70 million, all of which apparently came from crypto VC Andreessen Horowitz. The third funding round for Lido Finance took place earlier this month and it raised around $73 million from various crypto VCCS, 50 million of which came from Paradigm. This third funding round involved crypto VC's buying LDO tokens directly from the Lido Dao Treasury in exchange for around 21,000 ETH, a purchase proposal that was approved via governance by the Lido community. As per the proposal, all LDO tokens sold to VCs in the third funding round come with a one year lockup followed by a one year vesting Cliff just like the original distribution, albeit on a later schedule. It's not clear whether Andreessen Horowitz acquired any LDO as part of its investment, nor whether there's a vesting schedule involved. A quick trip to Etherscan reveals that the current distribution of LDO is fairly concentrated in the largest wallets, though most of these are smart contracts. Presumably the vesting contracts for Lido finances more recent investors. What's concerning is that there are only around 15,000 LDO holders on Ethereum, though I imagine there are many more holding their LDO on centralized exchanges. The distribution of steth and wsteth is likewise concentrated in the largest wallets, though almost all of them are smart contracts related to defi protocols. What's awesome is that there are over 75,000 Steth holders on Ethereum and this number seems to be increasing. This is despite the lack of support for Ste on centralized exchanges, though perhaps it's a consequence of this fact. Best of all, those teeth and waste have done a pretty good job of maintaining their pegs, though the format seems to be trading slightly below the price of ETH, and the latter is trading a bit above the price of ETH.

LDO Price analysis -:

So this brings me to the moment you've all been waiting for, and that's my analysis of LDO's price action. As you can see, LDOS rice action has been pretty dismal. Not only that, but the trading volume has been limited, and LDO even seems to have had a few speculative pumps and dumps. The first speculative pump took place last spring and it happened because Lido Finance announced it would be adding support for Solana. The rest of the crypto market was also rallying at the time. The second speculative pump took place last summer, and it happened because Lido finance released a referral program offering to share a portion of the estate of whoever you refer to the protocol. Lido Finance also added support for Terror's anchor protocol, partnered with the Ledger hardware wallet to make it possible to do liquid staking using a cold wallet, and officially added support for the Solana blockchain. The third speculative pump took place last winter, and it seems to have been caused by the news that maker Dao had opened its doors to using Steth as collateral to mint its decentralized stable coin die. Now, LDO's most recent speculative pump was caused by the announcement that Aavey would likewise be opening its doors to using Ste as collateral. Ladder finance also added support for the Polygon side chain, and of course there was lots of hype around that $70 million raise. Today LDO is trading almost 50% below its opening price and appears to be in a long term downtrend. This might have something to do with the fact that LDO circulating supply has increased from around 10 million to over 310 million over the last year and a bit. Assuming an average price of a dollar, which is being generous, there's been up to $300 million of cell pressure since the LDO token began trading. On the demand side, the only real demand driver seems to be speculation, and that has all but dried up with the advent of the crypto bear market. This means that LDO could continue to fall if the crypto bear market continues .

LDO Roadmap -:

As always, LDO's long term potential depends on the upcoming milestones for Lido finance, and there seems to be no shortage of those. First, there's the Lido finance road map, which was detailed in a blog post in July last year. As the title suggests, Lido finances long term goal is to make liquid staking completely trustless, meaning there's no centralized entity involved with depositing, staking, or withdrawing cryptocurrencies on the protocol. Lido finance is also obsessed with making sure Ethereum stays as decentralized as possible. And that means opening its doors to as many beacon chain validators as possible, while simultaneously making its protocol more attractive than other liquid staking alternatives found on centralized exchanges. There are only two factors that don't make Lido finance fully trustless, and the first is that all withdrawals from validators are controlled by a multisig wallet with 11 signatories, six of whom must sign each withdrawal transaction. Obviously, that's not very trustless nor practical for the long term. The second factor is the process of onboarding new validators for Lido finance, which you'll recall are vetted by the Lido dao. Although this ensures that Lido finance validators are legit, it also serves as a point of trust and simultaneously deters more decentralization. The authors note that the first factor will eventually be solved through smart contracts the same way it was with protocol deposits, but the second factor will be much more difficult to address, and a series of solutions such as on chain and off chain reputations were proposed. In a follow-up blog post from April this year, Lido Finance detailed the characteristics of a good validator set and proposed two concrete solutions for how additional validators can be onboarded. The first solution is decentralized validator technology or DVT, wherein validators can work together to sign a single block. This allows new validators to be onboarded as part of an existing validator group, which makes it possible for the protocol to accommodate manipulation or failure from new validators. The second solution is node operator scores or Nos, which will create a reputation for each validator based on a series of metrics, potentially including LDO Stakes, which could be slashed. The author specified that DVT will be rolled out first and Nos will follow. No timelines were provided, but I suspect any timelines will be up to the Lido dao. They also note that they will make it possible for steth holders to veto any decisions made by the LIDAO as an additional layer of protection. The snapshot page for the Lido dao reveals that there are only three active proposals, the first of which just seems to be a test question. The second one proposes reducing the referral fees for Ethereum staking, and the third proposes increasing the cost of making proposals. Both proposals are currently passing, so expect to see those implemented soon. On the Lido Dao forum there seems to be quite a bit of discussion about adding support for Avalanche and near protocol. I couldn't help but notice that our friend Kobe, AKA Lido Finance cofounder Jordan Fish is actively participating in the discussions along with well known Ethereum developer Tim Baker. I also noticed that the Lido Finance GitHub has a few code repositories related to Cosmos, which could be foreshadowing support for a third proof of stake cryptocurrency. Now, if you're unfamiliar with Avalanche , you can find out about the project by clicking on me .

LDO Concerns -:

Now, I'd be remiss if I didn't mention the potential concerns I have about Lido finance. My first is potential bugs lurking in the protocol, and that's mainly because serious bugs in Lido finances code have been discovered on two occasions. The first bug was discovered in October last year and it put over 20,000 ETH at risk. Luckily, the bug was caught and fixed before an exploit occurred. The second bug was discovered in March this year and it pertained to many front ends for the Lido finance protocol. The bug was once again caught and fixed before any exploits occurred. Now, I'm pretty sure that more bugs will continue to be discovered, and that's because adjustments to the protocol will continue as ethereums transition to proof of stake continues. This is something that's been mentioned by the Lido Finance team, and no matter how competent they are or how many audits are done, there will always be room for error. This ties into my second concern, and that's the potential issues that could arise at the other layers of Lido finance, specifically the other blockchains that its liquid state assets have been bridged to and it's governance process. As some of you will know. Steth was one of the assets being used as collateral in Terra's anchor protocol. And when Terra collapsed in mid-May, it caused steth to lose its peg as traders started to wonder whether it could be possible to retrieve all the Ste stuck on the terror blockchain. The possibility that people could start to panic sell Steth, for whatever reason, is something that's been mentioned by the Lido finance team as well. And in my mind, the risk of that happening will increase as the protocol continues to grow, along with the balances of Steth on other blockchains. As for the governance vector, if Lido finance continues to grow at the rate that it has, it's quite possible that it could become the de facto governance layer of Ethereum itself once it completes its transition to proof of stake. That's because if 100% of the Earth being staked on the Beacon chain was being done through Lido Finance, then the Lido Dao would have an unbelievable amount of influence over Ethereum itself. Now, the Lido finance team actually believes this is inevitable due to the demand for liquid staking. Consider that current estimates see the protocol holding 50% of all staked eth in just the coming months. I suppose that explains why VCs are so hungry for LDO despite its poor price action. This relates to my third concern, and that's regulation. It's clear that regulators aren't fans of any crypto projects that provide a yield of any kind, particularly defi protocols. With the staking rewards on Ethereum expected to double after the merge, this could put Lido finance and other liquid staking protocols on their radar, and it seems Lido is already preparing for this upcoming regulatory storm. That's because an article on the Lido Finance website notes that the protocol is unavailable in some countries due to regulatory uncertainty. And though this list seems to be limited to countries sanctioned by the United States and its allies, it's a list that could grow really quickly for other reasons. It's also hard to have decentralization and trustless as a goal while simultaneously restricting users from certain regions. In Lido finances defense, these restrictions are probably occurring at the infrastructure layer of ethereum itself. The infrastructure layer is just one of the many layers in a cryptocurrency's decentralization .

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