Lido provides high returns through decentralized efforts

by Arthur · February 16, 2023

It was less than a year ago that the US was flooded with crypto ads promising consumers that they could get easy returns of 7% or more. We all know how that ended. The companies behind these ads are now out of business or facing lawsuits, and many of their customers are wondering if they’ll ever see their money again.

All this makes me skeptical to write about some crypto service that offers returns higher than a bank CD rate, but in the case of Lido, it’s exciting enough to take a look. If you’re not familiar, Lido is in the betting business – a very different operation to Celsius and other high-profile advertisers from 2022, whose business model was based on casino-style lending.

Staking is not based on lending at all, but instead involves getting paid to run proof-of-stake blockchains like Ethereum. To do this, and verify transactions, you need to be a validator – an operator with special software that, in the case of Ethereum, also needs to unlock 32 Ether tokens as part of a system to ensure honesty. But most people don’t have 32 Ether – currently worth around $50,000 – and that’s where Lido comes in.

Lido is one of a number of “staking as a service” operations that run validator nodes and, in return for a 10% cut, allow anyone to unlock a small amount of crypto to share in the proof-of-stake rewards. The current return for those staking Ethereum on Lido is just over 5%. And while staked Ethereum cannot be withdrawn until an expected upgrade to the blockchain goes into effect this spring, Lido users receive tokens called stETH that are worth roughly the same as Ethereum and can be traded or sold at any time.

All this may sound like too much trouble for ordinary investors, but for many Lido is about more than 5% returns. According to Jacob Blish, head of business development at Lido, the service was built by developers who feared the growth of proof-of-stake blockchains would bring excessive centralization as large entities like Coinbase and Andreessen Horowitz took over the validation process.

So far the project is working. While Coinbase actually controls a significant number of validators on the Ethereum network, Lido – which is based around a decentralized protocol – runs even more. Lido also got a boost this month after the Securities and Exchange Commission went after the exchange’s Kraken staking-as-a-service offering. In the view of many in the crypto world, Lido is beyond the reach of the SEC because at its core it is a decentralized software that no one totally controls.

But when I chatted with Lido’s Blish he offered a more cautious assessment. Blish noted that while Lido has many decentralized elements — including a DAO that handles corporate governance issues — it’s not completely out of reach for regulators. He says that when push comes to shove, agencies like the SEC could go after anyone—including him—connected to The DAO. This would not shut down Lido since its underlying protocol would continue to function, but it would make it much more difficult to use.

For now, however, Lido does not appear to face any immediate regulatory threats. And in the longer term, it is likely to prosper because, unlike the crypto companies that announced flashy returns a year ago, Lido is based on much more than high-risk lending.

Jeff John Roberts
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@jeffjohnroberts