Lido Floods Layer 2s with Staked ETH After Launching Incentives Program
Lido Scrambles to Counter Coinbase and Rocket Pool as Staked ETH Market Heats UpDeFi News
Lido is flooding Arbitrum and Optimism, Ethereum’s most popular scaling protocols, with its staked ETH tokens. And it’s set aside half a million dollars in incentives to do so.
Less than a week after Lido announced its integration with Arbitrum and Optimism, the Layer 2 blockchains have received a combined $9M in wstETH.
Holding about than $6B in user assets, Lido is the second-largest decentralized finance protocol on Ethereum, according to data compiled by The Defiant. It allows users to contribute to the security of Ethereum without the sacrifice that process otherwise entails. The move to Layer 2s is a sign the staking giant is seeking all avenues to increase its market share as competitors inch in.
Curve TVL + Aave TVL + Lido Finance TVL + Uniswap TVL + Maker TVL, Source: The Defiant Terminal
Lido has lost market share in recent months to centralized exchanges, such as Coinbase, that also stake ETH on users’ behalf, according to research from Nansen. And decentralized competitor Rocket Pool has launched its own incentives program in a bid to dethrone Lido. But Lido still controls roughly one-third of that market.
Some researchers have speculated that most ETH in circulation will eventually be staked and will circulate as derivative tokens issued by Lido or one of its competitors.
To secure Ethereum, users must lock up, or stake, their ETH in exchange for a modest annualized reward. In doing so, however, they lose the ability to put that ETH to use in more lucrative DeFi protocols. Lido addresses this by staking users’ ETH on their behalf and issuing an equal number of derivative tokens, which typically trade at or near the value of ETH and can be used across the DeFi ecosystem and are known as stETH, for “staked ETH.”
Taking that one step further, wstETH, or “wrapped” stETH, is a version of the stETH token that can be used in a broader range of DeFi protocols. Its balance does not change daily as staking rewards are claimed, a feature that makes it easier to integrate the token with DeFi dapps.
Integration with Layer 2 blockchains like Arbitrum and Optimism dramatically lowers the cost of trading Lido’s wstETH token, which was chosen due to its “ease of integration across various DeFi partners,” Lido said on Twitter.
Trading a token isn’t just a question of software engineering, however, but of economics — is there enough liquidity in the market for that token to make buying and selling it easy and efficient for both parties?
Lido is offering incentives to users who provide wstETH liquidity on Arbitrum and Optimism, and has set aside 150,000 LDO, worth about $220,000, on each protocol. Incentives are already available on protocols Kyber, Balancer and Beethoven X and are scheduled to debut on Curve, Beefy Finance and Velodrome in the coming days.
With wstETH, liquidity providers were able to earn incentive-subsidized annualized rewards as high as 40% on Monday. The program seems to be working: almost $4M of wstETH has been bridged to Arbitrum, while more than $5M has been bridged to Optimism, according to data from Dune Analytics.
LDO was trading at $1.55 at the time of the announcement and is down 14% since, to $1.34, according to data from The Defiant Terminal.
LDO Price, Source: The Defiant Terminal
Crypto die-hards have pushed for Lido to decentralize and thereby limit its ability to censor transactions, even if network effects were to make it the undisputed leader in staking.
Liquid Staking Derivatives Pose 'Significant Risks' to Ethereum 2.0: Report
LSD Protocols May Make Ethereum Vulnerable to Abuses of Power After Shift to PoSThe Defiant
To that effect, crypto firm Nethermind has asked Lido to finance its research into “decentralized identity and verifiable credentials.” That information could, one day, allow Lido to onboard trusted hardware operators in a decentralized, permission less manner.
Voting on the proposal began Monday and will end October 17.