Lido Staking (Step by Step for Beginners)

What is Lido?

Launched in 2020, Lido is a liquid staking solution for proof-of-stake (PoS) cryptocurrencies. 

What is liquid staking?: When you stake ETH in Lido, you receive stETH — which can be redeemed for ETH at any time. While ETH staking typically means that your crypto is ‘locked up’ and can’t be used in transactions, stETH can be freely traded and used in DeFi transactions — giving you more flexibility! 

What cryptocurrencies does Lido support?: Currently, Lido supports Ethereum. Lido no longer supports cryptocurrencies like Solana. 

Who runs Lido?: Lido is fully decentralized. The platform is governed by a decentralized autonomous organization (DAO), where holders of its native token LDO make governance decisions. 

How do I get started staking on Lido?

Staking on Lido is simple. Here’s how to get started:

1. Go to stake.lido.fi.

2. Select the wallet you wish to connect.

3. At this point, you’ll see the APR that Lido is currently offering on staking rewards. Enter the amount of ETH you wish to stake. 

4. Review the details of the transaction, then click ‘Confirm’. 

Once you’re finished:

• You’ll start earning ETH staking rewards.
• You’ll receive stETH in your wallet. 

Lido staking vs. traditional staking 

Let’s walk through some of the differences between staking on Lido and traditional ETH staking. 

How does Lido work? 

As as a decentralized protocol, Lido uses smart contracts to perform the following functions: 

Manage Deposits and Withdrawals:
Lido’s smart contracts handle all user transactions, including ETH deposits and withdrawals. This allows for a seamless trading experience without any centralized intermediary. 

Delegate Staked Ethereum:
Staked ETH is distributed across a diverse network of validators chosen by the Lido DAO. This decentralization minimizes risk and provides maximum security for users. 

Mint and Burn stETH Tokens:
When users stake ETH through Lido, stETH tokens are minted. When ETH is withdrawn, Lido’s contracts burn the corresponding amount of stETH, maintaining the total balance. 

Set and Allocate Staking Fees:
A 10% fee is applied to staking rewards, split between node operators and the Lido DAO. The protocol’s smart contracts manage fee distribution automatically to ensure fairness and transparency. 

Is Lido good for staking? 

Lido is a great option for those looking to earn staking rewards from their ETH, but who wish to have liquidity and flexibility in the form of stETH. 

Lido is a popular option for Ethereum investors. Currently, Lido controls more than 27% of the total supply of staked ETH. 

Benefits of Lido

Let’s walk through the benefits of Lido. 

Earn rewards while maintaining liquidity: stETH tokens can be traded or used in DeFi protocols. 

Stake without hardware: By pooling assets and relying on professional validators, Lido eliminates the need for expensive equipment or technical expertise for staking. 

Participate in decentralized governance: LDO (Lido DAO) token holders vote on governance decisions, ensuring the platform evolves to meet users' needs.

How does Lido work? 

Lido simplifies staking by pooling users’ assets and delegating them to verified validators. Here’s how the process works:

1. Deposit Funds: Users deposit their PoS assets (e.g., ETH) into Lido’s staking pool.
2. Receive stTokens: Lido mints stAsset tokens like stETH, representing the staked assets.
3. Validation: Deposited assets are distributed among Lido’s network of validators, who use public validation keys to secure the network.
4. Rewards: Staking rewards are distributed to users, increasing the value of stAsset tokens.

What are the risks of Lido staking? 

Let’s walk through some of the drawbacks of staking on Lido. 

• Fees: Lido charges a 10% fee on staking rewards. 
• Withdrawal process: Withdrawing your ETH typically takes 1-5 days on Lido. This can be longer if Lido goes into ‘bunker mode’ (special situations with highly adverse network conditions). 
• Smart Contract Bugs: It’s possible that Lido’s smart contracts could contain a bug/vulnerability. However, it’s important to note that Lido’s smart contracts are open-sourced and regularly audited. 
• Blockchain/validator risks: Any risks associated with the Ethereum blockchain or any specific Ethereum validator may also apply to Lido. 
• stETH price risk: Due to withdrawal restrictions, the price of stETH may be lower than its inherent value. 

Is staking on Lido a taxable event? 

It’s likely that swapping ETH for stETH and vice versa will be considered a crypto-to-crypto trade subject to tax. 

You’ll incur a capital gain or loss depending on how the price of your ETH/stETH has changed since you originally received it. 

Looking for an easy way to track your staking taxes from Lido and other DeFi protocols? Try CoinLedger. The platform can immediately connect to your wallets and exchanges and generate complete tax forms in minutes. 

Conclusion

Lido offers a user-friendly and flexible way to stake Ethereum. By addressing the limitations of traditional staking, Lido has become one of the most popular staking platforms in the DeFi ecosystem.