Lido is the largest liquid staking protocol in DeFi, holding over $28 billion in staked ETH and controlling approximately 30% of all Ethereum validators. Launched in December 2020, just weeks after Ethereum's Beacon Chain went live, Lido solved a critical problem: ETH staked natively required a 32 ETH minimum and was completely illiquid. Lido made staking accessible to any amount while issuing stETH — a liquid token representing staked ETH plus accumulated rewards.
How Lido Works
Users deposit ETH into Lido and immediately receive stETH at a 1:1 ratio. stETH is a rebasing token: each day, the total supply increases proportionally to Ethereum staking rewards earned by Lido's validators. If you hold 100 stETH and the daily staking yield is 0.01%, tomorrow you hold 100.01 stETH. The price of stETH in ETH terms stays close to 1.0 (with small discounts/premiums based on liquidity conditions).
Lido operates a curated set of professional node operators — institutions like Chorus One, P2P.org, Figment, and dozens of others. These operators run Ethereum validators using pooled ETH. Lido does not run validators itself; it coordinates and governs the operator set.
stETH Liquidity
stETH is the most liquid ETH derivative in DeFi. The Curve stETH/ETH pool is one of Curve's largest, providing billions in swap liquidity. stETH is accepted as collateral on Aave, Compound, Spark, Maker, and dozens of other protocols. This deep composability is Lido's primary competitive advantage — no other LST approaches stETH's DeFi integrations.
LDO Governance
LDO governance token holders vote on node operator whitelisting, fee parameters, and protocol upgrades. The Lido DAO has been criticized for centralization concerns: a relatively small number of whale LDO holders control major governance decisions. Additionally, Lido's 30%+ validator share raises concerns about Ethereum's validator diversity — a single point of failure at this scale could threaten Ethereum's consensus.
The Lido Centralization Debate
Ethereum core developers and the community have expressed concern about Lido's growing market share. A Lido-controlled 33%+ stake could theoretically delay block finality (though not control it). Vitalik Buterin and others have suggested Ethereum's social layer would reject any governance attack from an overly dominant LST. Lido has stated it will self-limit at 33% of all validators, but this commitment is not enforced by code.
stETH in DeFi Strategies
The most common stETH strategy: deposit stETH into Aave as collateral (earns staking yield + Aave supply yield), borrow USDC against it, and deploy USDC into higher-yield opportunities. The staking yield (~3.8%) plus Aave supply rate (~2–3%) partially offsets the borrow cost, creating a leveraged position with minimal net borrowing cost.
During the June 2022 depeg, stETH fell to 0.94 ETH on Curve — a 6% discount. Users who bought discounted stETH and held until peg restoration (which occurred months later after Shanghai upgrade enabled withdrawals in April 2023) earned substantial returns on the discount recovery.