Lido Staked Ether Explained: A Beginner’s Guide to stETH
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Staking protocols have become immensely popular among crypto users for their ability to offer returns on idle tokens. Among all the staking protocols in the market today, no platform has dominated proceedings quite like Lido.
Lido is currently the most valuable decentralized application (dapp) in the world in terms of total value locked (TVL). The biggest draw of Ethereum staking with Lido is the platform’s liquid staking token called stETH which was created to solve the illiquidity problem of staking. stETH has not only gone on to solve this issue but become a critical crypto asset used across decentralized finance (DeFi) for collaterals, trading, lending, and restaking.
If you are someone who wants to stake ETH, it is highly recommended that you learn what is stETH. With our Lido stETH review, you will learn about its pros and cons, technical details, DeFi use cases, and more.
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Lido Staked Ether Review: Summary
In this article, we will first explain the basic concepts related to proof-of-stake (PoS) blockchains that you will need to get a better understanding of liquid staking protocols like Lido. We will then talk about how the Lido protocol functions and what makes it different from its competitors.
Most importantly, we will list out the pros and cons of using Lido and stETH to help you decide whether they are a good fit for you.
Key Highlights
- Illiquidity issue: Ethereum staking users to deposit and lock up their ETH tokens.
- Lido pioneers liquid staking: When stakers deposit ETH tokens on Lido, they receive stETH tokens in return which can be freely traded and used across DeFi applications.
- Lido dominance: At one point in time, Lido was responsible for nearly one-third (33%) of all ETH staked on Ethereum.
- Ethereum staking returns: Historically, the return on Lido Staked Ether is between 3% to 4% APR.
- Fees on Lido: Lido charges a 10% fee on staking rewards.
- Potential risks of Lido: Lido stakers need to be aware of stETH withdrawal delays, slashing penalties, smart contract vulnerabilities, and depegging risks.
What is Lido Staked Ether?
Lido Staked Ether (stETH) is a cryptocurrency token that represents Ether (ETH) tokens staked using the Lido staking protocol. The stETH token launched ahead of Ethereum’s transition from a proof-of-work (PoW) blockchain to a PoS blockchain in a move better known as “The Merge.”
- Lido Staked Ether
(STETH) - Price $3,299.61
- Market Cap
$31.8 B
stETH has become so popular today that the token currently holds 71% market share in the liquid staking derivatives (LSD) market.
Key Topics to Learn Before Understanding Lido Staked Ether
Ethereum staking and PoS consensus mechanism are a few basic crypto concepts that you need to learn about to understand how Lido Staked Ether works.
What is Proof-of-Stake consensus mechanism?
PoS consensus mechanism is a method where network participants known as validators verify and process transactions on a blockchain. In return, validators earn block rewards for their honest work. In order to become a validator on Ethereum, you will have to stake or lock up 32 ETH tokens, run validator node software, and ensure that your dedicated staking computer is connected to the internet 24/7.
Ethereum incentivizes honest work by rewarding newly minted ETH tokens to validators who successfully create new blocks. stETH users have to keep in mind that Ethereum validators can lose their staked deposits and risk forceful removal from the network for dishonest activity, in a process called slashing.
What is the Lido Protocol?
Lido Finance or Lido Protocol is a liquid staking platform that allows users to seamlessly stake their cryptocurrencies on Ethereum and Polygon (POL).
Launched in 2020, Lido pioneered liquid staking with the introduction of its stETH token. On Lido, users receive stETH when they stake ETH. stETH allows stakers to accumulate rewards while unlocking capital to be invested or traded across crypto platforms. Furthermore, those looking for convenience are drawn to Lido as the platform allows users to stake cryptocurrencies without having to worry about maintaining staking hardware, minimum collateral requirements, and slashing penalties.
Lido Protocol is managed by a decentralized autonomous organization (DAO) known as the Lido DAO. The Lido DAO has a native token called LDO which gives holders the power to vote on governance proposals, protocol changes, and the future of Lido. Readers should note that Lido charges a 10% fee on staking rewards. Furthermore, Lido conducts extensive bug bounty programs offering rewards of up to $2 million to anyone who reports a vulnerability in their smart contracts.
How Does Lido Protocol Work?
Lido’s front end has a seamless and user-friendly interface. Anyone with a crypto wallet can log in to Lido’s website and stake their ETH tokens. You will have to pay transaction fees, better known as gas fees to process the transaction. Note that gas fees are not paid to Lido but to Ethereum’s validators. Once your staking process is successfully executed, you will find stETH tokens in your wallet.
The backend is where Lido Finance differentiates itself from other staking platforms. Lido operates using a permissioned node operator model. In order to become a validator node operator on Lido, users have to first express their interest in the Lido DAO. When the node operator is approved via governance voting they will be eligible to receive a part of Lido’s pooled ETH tokens. Lido then distributes 32 ETH tokens each evenly between its reputable node operators.
Meanwhile, Lido’s competitors such as RocketPool follow a decentralized and permissionless model. On Rocketpool, anyone can run a validator node by locking up 8 ETH tokens as collateral. The remaining 24 ETH tokens are pooled from Ethereum stakers.
The use of the permissioned node operator model is a key reason why Ethereum staking with Lido has exploded. This model allows Lido’s chosen operators to manage multiple validator nodes without depositing any collateral. In contrast, the need to lock up collaterals worth 8 ETH on Rocketpool creates a bottleneck to scaling and limits node operator growth in permissionless models.
What is Liquid Staking?
Liquid staking is a process that solves the illiquidity problems related to staking by issuing derivative tokens. As explained earlier, whenever a user stakes ETH tokens on a liquid staking platform like Lido Finance or Rocketpool, they receive receipt tokens that can be used across various DeFi platforms.
At the time of writing, Lido Staked ETH was the top liquid staking token with a TVL of over $38.5 billion. Binance staked ETH token came in second with a TVL of about $6.7 billion. Rocket Pool’s rETH token came in third with a TVL of about $2.9 billion, data on DeFiLlama showed.
How Liquid Staking Helps Lido?
Lido has become the largest Dapp by TVL across all blockchain networks due to the success of its liquid staking solutions. Over the years, Lido’s TVL has more than doubled from about $15.4 billion at the start of 2021 to over $38.5 billion by December 2024. Meanwhile, the market price of the Lido Staked ETH token has closely tracked the price of the underlying ETH over the years showcasing stability and investor confidence in the Lido protocol.
But Lido’s climb to the top has not always been straightforward.
Before the completion of “The Merge”, liquid staking derivative tokens like stETH were trading at a discount to the underlying ETH due to uncertainties and risks related to Ethereum’s transition to PoS consensus mechanism. It was only after the successful execution of “The Merge” in September 2022 that the liquid staking sector saw meteoric growth.
The Ethereum “Shapella” upgrade – which removed withdrawal restrictions on staked ETH tokens in April 2023 – further solidified the violability of liquid staking platforms and enabled Lido to grow into the largest DeFi protocol on Ethereum.
What are Lido LSTs?
Lido’s liquid staking tokens, better known as LSTs, are tokens that represent the underlying staked cryptocurrency.
Since Lido’s staking services were available on Ethereum and Polygon blockchains, it has two liquid staking tokens – stETH on Ethereum and stMATIC on Polygon – which users receive after depositing ETH and Polygon tokens, respectively, on Lido.
Types of Lido LSTs
In addition to Lido’s primary LST tokens – stETH and stMATIC – available on Ethereum and Polygon, the protocol also provides a wrapped version of its LST tokens, which were created to make liquid staking tokens more usable on various DeFi applications.
Let’s focus on the stETH token. If you have ever held stETH tokens in your crypto wallet, you will notice that the balance of your stETH increases every day due to incoming staking rewards. Lido calls such tokens “rebasable tokens.” The problem is that not all DeFi platforms support rebasable tokens. To fix this issue, wrapped LST tokens were introduced to keep the balance of a holder’s stETH balance fixed.
Basically, Lido’s wrapped LST tokens offer users with a DeFi-compatible version of Lido’s liquid staking tokens, allowing them to be used for various DeFi activities. Instead of the amount of stETH increasing on receiving staking rewards, the wstETH token sees its price denomination change based on the underlying rewards.
stETH: Offers High Liquidity
The stETH token’s deep liquidity compared to rival liquid staking tokens has made it an incredibly popular crypto asset. stETH’s highly liquidity nature ensures that the token can be easily exchanged for ETH or other tokens on decentralized exchanges (DEX). Crypto traders also benefit from this property as spread and slippages remain low when using stETH for various defi applications.
wstETH: Compatible with Most Protocols
As we explained earlier, the extra DeFi compatibility that Lido provides to its users is all thanks to its wrapped liquid staking tokens. wstETH provides a layer of compatibility for Lido’s liquid staking token to be used across different DeFi protocols and cross-chain bridges that do not support rebasable tokens such as stETH.
Getting wstETH tokens is fairly easy. Head on to Lido’s website where you can mint wstETH tokens by depositing stETH into their wrapper smart contract. You can also exchange your available tokens for wstETH on decentralized exchanges such as Uniswap and SushiSwap. Remember to always ensure that you have enough ETH in your wallet to pay for gas fees. You can also get wstETH tokens on various DeFi protocols like 1inch, SushiSwap, and Uniswap.
wstETH holders will also be happy to learn that Lido has integrated the token to be used on popular blockchains, liquidity pool platforms, lending protocols, bridges and DEX aggregators such as Curve, Balancer, Matcha, Maker, and Aave.
Role of stETH and wstETH in Lido’s Ecosystem
Lido’s easy-to-use interface allowed non-technical individuals to stake ETH and earn passive income on their tokens. Add the popularity of stETH and wstETH tokens among DeFi users, and we have a platform that has dominated the Ethereum staking sector since its launch. At one point in time, Lido was responsible for nearly one-third (33%) of all ETH staked on Ethereum. This led to concerns over staking centralization due to Lido’s market dominance.
Lido’s ecosystem continues to grow as stETH and wstETH tokens are integrated across different defi protocols. Onchain users looking to maximize their capital efficiency through lending, restaking, trading, and liquidity farming activities prefer such crypto assets.
How Lido Staked Ether Works?
Once you deposit your ETH tokens on Lido, they are sent to node operators who will stake the tokens on your behalf. You will receive an equivalent of stETH token in return, which means that if you stake 1 ETH you will receive 1 stETH. As for your rewards, you will start earning them within 24 hours of your deposit made on Lido.
It is important to note that stETH tokens accrue daily staking rewards regardless of whether you acquired the stETH tokens by directly staking on Lido, purchasing it from a DEX, or receiving it from a friend. Returns on stETH will ultimately depend on the Ethereum protocol’s gross annual percentage rate (APR) and Lido’s fees. Historically, the return on stETH is between 3% to 4% APR.
If you are wondering about the market value of stETH, you should know that stETH’s value is pegged to the underlying ETH token. However, this does not guarantee that stETH will always hold the same market value as ETH. Liquidity risks, Lido fee structure, and smart contract vulnerabilities can adversely affect the market value of stETH.
Difference Between Lido Staked Ether and stETH?
Lido staked Ether and stETH are the same token. “stETH” is the ticker or symbol for Lido staked Ether.
Pros and Cons of Lido Staked Ether
Ethereum users have a plethora of options to stake their idle ETH tokens and earn passive income on them. In this section, we look at the pros and cons of Lido’s stETH token to help you whether you want to use it as your go-to staking method.
Pros of stETH: Cons of stETH:
Best Wallets for Lido Staked Ether
In order to stake your ETH tokens on Lido, you will need a crypto wallet. Here are some best crypto wallet options for you:
Best Wallet – Best Wallet is a self-custodial wallet that is available to download for free on the App Store and Google Play. The wallet implements strong security measures like two-factor authentication (2FA), biometric verification and third-party insurance. You can learn more about why this wallet is our #1 pick in our Best Wallet Review.
Exodus – Exodus is an entry-level crypto wallet best suited for beginners for its simple design and online support. Exodus is available as a smartphone application as well as a desktop browser wallet.
Zengo – Zengo is a keyless mobile and desktop cryptocurrency wallet. Zengo looks to improve crypto user experience by removing tedious set up processes like creating passwords and securing secret recovery phrases.
How to Stake ETH on Lido
Next, let’s go through the steps that Lido users need to go through to stake their ETH tokens.
Step 1 – Visit the Lido Platform
Visit Lido’s official website. Make sure to double-check the website address to ensure that you can are not visiting a malicious website. Click on the “Stake” button on the homepage. You will be directed to Lido’s staking interface.
Step 2 – Connect Your Wallet
Once you are on Lido’s staking interface, you will have to connect your crypto wallet with the protocol. Click the “Connect wallet” button.
Once you have accepted Lido’s terms and conditions and privacy notice, you will be given the option to choose the wallet you use. Depending on your wallet option, you will either be prompted to accept the connection request on your desktop browser wallet or you will be asked to scan a QR code to connect with your mobile wallet. In case you don’t see your crypto wallet in the given options, you can click on the “More wallets” button. You can also use the “WalletConnect” solution to connect your crypto wallet to Lido.
Whichever method you choose, always double-check the permission and signature requests on your wallet before accepting them.
Step 3 – Enter the Amount of ETH to Stake
Next, enter the amount of ETH you wish to stake. Ensure that you have enough ETH balance in your wallet to pay the gas fees. Once you’ve entered the amount, Lido will show you the amount of stETH that you will receive from the transaction. Lido will also notify you of the maximum transaction fees that you will have to pay.
Step 4 – Confirm and Stake
When ready click on the “Stake” button. You will be prompted to accept the permission request on your crypto wallet. Always check the gas fees that you will be paying to complete the transaction. Incase you feel that the gas fees on Ethereum are higher than average, you can initiate the transaction later when the overall network activity on Ethereum is lower.
Once you accept and finalize the transaction, you will find stETH tokens in your crypto wallet.
Best Practices for Secure Lido ETH Staking
Cryptocurrencies are all about decentralization and self-custody. On the flip side, crypto is also about being responsible for managing and securing your digital assets. With this in mind, here are the best practices that you need to know about to secure stake ETH on Lido.
Use a Secure and Trusted Wallet
Your crypto wallet is your bank. It is also the gateway to the world of decentralized finance. Therefore, it is critical for you to choose a secure wallet that you can rely on. When choosing a crypto wallet, it is recommended to keep security as your priority. Once the security criteria are met, you should select wallets that are compatible with the decentralized applications you plan to use.
When it comes to Lido staking, we have to choose a crypto wallet that is compatible with the Ethereum blockchain.
Keep Private Keys and Seed Phrases Safe
Private keys are alphanumeric codes used to authorize crypto transactions and prove ownership. As a crypto user, you must ensure that the private keys to your crypto wallet do not get leaked or fall into the wrong hands. Additionally, users must secure the seed phrases of their crypto wallets. Seed phrases are needed to recover crypto wallets and the tokens held in it.
If you lose your mobile device or forget your wallet password, only the seed phrase can help you recover your lost wallet.
Monitor Gas Fees and Confirm Transactions
The Ethereum blockchain is known for its expensive and volatile gas fees. As an ETH staker on Lido, you will come across instances when the gas fees required to execute transactions are higher than average. During such time, it will help if you monitor gas fee trends and plan to execute your transaction at a favorable time when the gas fees are low.
Furthermore, crypto wallet users must be careful when confirming transactions. The crypto world is infamous for scams and hacks. One way to prevent such events is by double-checking digital signature requests on your crypto wallet.
Future of stETH
Lido’s stETH is the most popular liquid staking derivative token in the world. Wide DeFI integrations and growing acceptance have made it the undisputed leader in the Ethereum staking sector. But will stETH’s dominance continue? Let’s hear what the experts have to say.
In a note, Kaiko Research said that the staked ETH market has cooled in 2024 due to declining staking rewards amid the emergence of “higher-yielding new players” and restaking alternatives.
“While staking inflows have begun to taper off, growth in the supply of the largest Ethereum staking participant has plateaued. The supply of Lido’s staked ETH, stETH, has remained relatively constant this year, averaging 9.6 million ETH. This reflects a slower growth in the overall amount of ETH deposited in the Beacon Chain contract,” – Kaiko Research. “Beyond external protocol-level competition, stETH also faces increased competition as collateral within DeFi protocols, many of which now offer more token options for collateral use,” they added.
Meanwhile, Blockworks called stETH “arguably the best product for gaining exposure to staked ETH” in a research report.
Looking forward, Blockworks added:
“More importantly, if TradFi develops staked ETH products, stETH and Lido DAO are positioned to serve an increasingly important role in Ethereum, more broadly.” – Blockworks
Conclusion: Lido Staked Ether Review
Lido is an industry leader that has set the standard for the liquid staking sector. For beginners, it is one of the best staking platforms to experience Ethereum staking for the first time due to its user-friendly interface.
Crypto investors who wish to extract every last bit of juice from their ETH investments can take advantage of the deep liquidity and wide DeFi integration of the stETH token. Overall, Lido and its stETH token are products that can be used by crypto users of all experience levels.
Frequently Asked Questions
What is Lido Staked Ether?
What makes stETH different from Lido Staked Ether?
Can stETH be traded or used as collateral?
How does Lido ensure the security of staked assets?
Are there any fees involved in staking ETH with Lido?
How do I stake ETH on Lido?
Can I withdraw my stETH for ETH?
References
- Node operators – General Overview. Lido Finance, https://docs.lido.fi/guides/node-operators/general-overview
-
What is Lido’s wstETH? Lido Finance, https://help.lido.fi/en/articles/5231836-what-is-lido-s-wsteth -
How long does an Ethereum withdrawal take? Lido Finance, https://help.lido.fi/en/articles/7858315-how-long-does-an-ethereum-withdrawal-take - The Merge. Ethereum.org, https://ethereum.org/en/roadmap/merge/
- Mainnet Shapella Announcement, Ethereum.org, https://blog.ethereum.org/2023/03/28/shapella-mainnet-announcement
- Liquid Staking Derivaties. DeFiLlama, https://defillama.com/lsd
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