Understanding Lido: A Technical Guide to Liquid Staking

Lido is a leading decentralized liquid staking protocol that allows users to stake assets—such as Ethereum—without locking them up. Participants receive derivative tokens (like stETH) that represent their staked holdings and accumulate rewards over time. These tokens can be used across various decentralized finance (DeFi) applications, providing liquidity and flexibility that traditional staking lacks. This guide explores Lido’s architecture, key features, and operational mechanics in detail.

What Is Lido and How Does It Work?

Lido eliminates the need for users to manage validators or meet high staking thresholds individually. When you deposit assets into Lido, the protocol pools them with other users’ funds to activate validators on proof-of-stake networks. In return, you receive a liquid staking token that automatically accrues rewards.

For example, if you stake Ethereum, you get stETH—an ERC-20 token that balances increase periodically to reflect your staking earnings. This mechanism is known as rebasing. Alternatively, some networks use non-rebasing tokens where value appreciation happens through price adjustments.

Lido’s approach combines security with accessibility, making staking feasible for users with any amount of crypto assets. It supports multiple blockchains, including Ethereum, Solana, and Polkadot.

Core Architecture of Lido

Lido’s system is built around five functional groups, each containing specialized modules that ensure secure and efficient operations.

Deposit and Staking Infrastructure

This component is the entry point for user deposits. It includes:

• Deposit Security Module: Protects against malicious attacks during deposit processing.
• Staking Router: Manages validator selection and fund allocation.
• Lido Core: Handles primary logic, including staking requests and token issuance.
• stETH Token: Represents a user’s share in the staking pool.

When you deposit ETH, these modules work together to issue stETH instantly.

Oracle Infrastructure

Ocles provide critical off-chain data to Lido’s smart contracts. Key modules include:

• Accounting Oracle: Updates stETH balances daily based on actual staking rewards.
• Ejector Oracle: Identifies validators eligible for exit or withdrawal.

These oracles ensure that on-chain data accurately reflects network status and reward distribution.

Consensus Engine

This group manages validator activities according to network consensus rules. It consists of:

• ETH 2.0 Consensus: Enforces validator rules and reward mechanisms.
• Withdrawal Queue: Sequences withdrawal requests to prevent congestion.

The engine maintains order and compliance across all validator operations.

Withdrawal Mechanism

Introduced after Ethereum’s Beacon Chain upgrade, this mechanism enables users to unstake assets. It includes:

• Withdrawal Vault: Holds funds until withdrawals are processed.
• Withdrawal Queue: Manages request ordering.
• Bunker Mode: A safety feature that activates during network stress to protect funds.
• Turbo Mode: Accelerates processing during normal conditions.

This system balances security with efficiency during withdrawals.

Governance System

Lido uses a decentralized autonomous organization (DAO) for community-led governance. Its tools include:

• Aragon DAO: A platform for creating and managing proposals.
• LDO Token: Grants voting rights to holders.
• Lido EasyTrack: Simplifies routine decision-making.

Stakeholders vote on key issues, such as fee changes or protocol upgrades.

Distributed Validator Technology (DVT)

DVT enhances validator resilience by distributing key management and signing duties across multiple operators. This reduces reliance on any single entity and improves fault tolerance.

How DVT Works

• Key Sharing: Validator keys are split into shares using cryptographic methods.
• Quorum Signing: A subset of operators must collaborate to sign blocks.
• Fault Tolerance: Validators remain online even if some operators experience downtime.

Lido integrates DVT through partnerships with Obol Network and SSV Network.

The Simple DVT Module

Lido’s Simple DVT Module allows multiple node operators to manage validators collectively. It offers:

• Improved Security: Reduced risk of slashing or downtime.
• Permissionless Access: Lowers barriers to entry for solo stakers.
• Equitable Rewards: Allocates 8% of staking rewards to operators and 2% to the Lido DAO treasury.

This module is live on Ethereum mainnet, promoting a more decentralized validator set.

Step-by-Step: How Lido Processes Deposits and Withdrawals

Example: Depositing ETH

1. User Action: Bob deposits 1 ETH into Lido.
2. Token Issuance: Lido issues 1 stETH to Bob’s wallet.
3. Pooling: The protocol combines Bob’s ETH with other deposits until it reaches multiples of 32 ETH.
4. Validator Activation: Funds are delegated to node operators, who activate validators on the Beacon Chain.
5. Reward Accrual: Bob’s stETH balance increases automatically as rewards accumulate.

Example: Withdrawing ETH

1. Request Submission: Bob initiates a withdrawal for his 1.1 stETH (1 ETH principal + 0.1 ETH rewards).
2. Validator Exit: The Ejector Oracle identifies validators to unstake.
3. Fund Processing: Unstaked ETH moves to the Withdrawal Vault for distribution.
4. Token Burn: Bob’s stETH is burned, and he receives 1.1 ETH.

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Governance and the Lido DAO

The Lido DAO governs protocol parameters through community voting. LDO token holders decide on:

• Fee structures
• Node operator approvals
• Oracle selections
• Treasury allocations

The DAO uses a multi-stage governance process:

1. Research Forum: Ideas are discussed publicly for seven days.
2. Snapshot Voting: Off-chain polling requires a 5% quorum.
3. Aragon Voting: Successful proposals move to on-chain voting.
4. EasyTrack: Committees handle routine decisions.
5. Execution: Approved proposals are implemented automatically.

LIP-21: On-Chain Delegation

LIP-21 introduced delegation for on-chain voting, allowing LDO holders to assign voting power to others. This boosts participation and helps achieve quorum requirements.

Community Staking Module (CSM)

The CSM enables permissionless node operation. Key features include:

• Low Collateral Requirements: Operators bond 1.3–2.4 ETH instead of 32 ETH.
• Flexible Collateral Types: Bond in ETH, stETH, or wstETH.
• Reward Smoothing: Distributes rewards evenly to avoid volatility.

The CSM is live on mainnet, with full permissionless access expected in early 2025.

Tokenomics: LDO and stETH

• stETH: A rebasing token that increases in balance to reflect staking rewards. It is pegged 1:1 to the value of staked ETH plus rewards.
• LDO: A fixed-supply governance token with 1 billion units. Over 895 million are in circulation. Holders vote on protocol changes.

Growth and Ecosystem

Lido has distributed over $1.9 billion in rewards since 2020. It supports:

• 200+ node operators
• 30+ active developers
• 100+ integrated projects across 12 networks

Its total value locked (TVL) exceeds $24 billion, mostly in WETH on Ethereum.

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Frequently Asked Questions

What is liquid staking?
Liquid staking lets you stake cryptocurrencies without locking your assets. You receive a tradable token that represents your staked position and earns rewards.

How does Lido ensure security?
Lido uses audited smart contracts, distributed validators, and community governance to minimize risks like slashing or centralization.

Can I unstake my assets anytime?
Yes, Lido allows withdrawals once the underlying network supports them. Ethereum withdrawals typically process within a few days.

What are the risks of using Lido?
Rights include smart contract bugs, validator slashing, and market volatility. Lido’s DAO maintains insurance funds to mitigate potential losses.

Is Lido decentralized?
Lido aims to decentralize over time through DVT and permissionless modules. Currently, node operators are curated, but community participation is growing.

How are rewards distributed?
Rewards are added automatically to your stETH balance daily for Ethereum. Other networks may use different distribution mechanisms.

Conclusion

Lido democratizes staking by offering liquidity, accessibility, and security. Its modular architecture supports scalable operations across multiple blockchains, while DAO governance ensures community alignment. As Lido expands permissionless access and adopts DVT, it reinforces its commitment to decentralization and resilience in the staking landscape.