Lido Finance: Revolutionizing Liquid Staking in DeFi

As decentralized finance (DeFi) continues to reshape the financial landscape, one of the key components driving innovation is staking—the process of locking up cryptocurrency to support blockchain operations in exchange for rewards. While staking has become integral to proof-of-stake (PoS) networks like Ethereum, it presents a significant tradeoff: staked tokens are typically illiquid and cannot be used elsewhere while locked.

Enter Lido Finance, a protocol that aims to resolve this limitation through liquid staking, allowing users to stake assets and still retain access to their capital in the form of tradable tokens. In this article, we explore what Lido Finance is, how it works, its ecosystem, and why it's become a cornerstone of DeFi staking infrastructure.

What is Lido Finance?

Lido Finance is a decentralized liquid staking protocol that allows users to stake cryptocurrencies—primarily Ethereum (ETH)—while retaining liquidity through derivative tokens. When users stake ETH with Lido, they receive stETH (staked ETH) in return. This token accrues staking rewards and can be freely traded, lent, or used in other DeFi applications.

Founded in 2020 in response to the challenges around Ethereum 2.0 staking, Lido quickly became the most widely used liquid staking platform. As of mid-2025, Lido holds the largest share of Ethereum’s staked supply, having helped democratize access to staking and liquidity.

Why Staking Needs to Be Liquid

Traditional staking on Ethereum and other PoS chains requires users to lock their tokens for extended periods—often months or even years—especially when staking directly on Ethereum’s consensus layer. This can deter participation and reduce the efficiency of capital allocation.

Liquid staking addresses this by:

  • Maintaining liquidity: Users receive a liquid token representing their staked asset.
  • Enabling composability: These tokens can be used across lending platforms, DEXs, and other DeFi protocols.
  • Democratizing access: No minimum amount is required (unlike Ethereum’s 32 ETH for solo staking).
  • Reducing technical barriers: Users don't need to run validator nodes or worry about slashing risks themselves.

How Lido Works

At the core of Lido is a system of smart contracts that manage deposits, issue staking derivatives, and interface with professional node operators. Here’s a breakdown of the process:

  1. User Deposits ETH: Users stake ETH on Lido’s platform.
  2. Lido Issues stETH: For every ETH deposited, Lido mints stETH 1:1.
  3. Node Operators Stake ETH: Lido delegates the deposited ETH to vetted node operators who run validator nodes on Ethereum.
  4. Rewards Are Distributed: As rewards accrue, the stETH token’s balance increases, reflecting the yield.
  5. stETH Is Liquid: Users can trade or use stETH across DeFi protocols like Aave, Curve, and Uniswap.

Importantly, the stETH token is rebasing, meaning its balance in your wallet increases over time as rewards are earned.

Lido’s Governance: The Role of LDO

Lido is governed by holders of LDO, its native governance token. LDO holders can vote on proposals related to:

  • Onboarding new validators
  • Protocol upgrades
  • Fee structure changes
  • Treasury management

This decentralized governance ensures that the protocol evolves in a way aligned with the community’s interests, while also enabling transparency and adaptability.

Multi-Asset Staking Beyond Ethereum

Although Lido’s flagship product is ETH liquid staking, the protocol has expanded to support multiple blockchains:

  • Polygon (MATIC)
  • Solana (SOL) (Note: As of late 2023, support was phased out due to validator and ecosystem concerns)
  • Polkadot (DOT)
  • Kusama (KSM)

Each of these staking offerings issues its own liquid token (e.g., stDOT for Polkadot). However, Ethereum remains the dominant source of deposits and usage.

Integration Across the DeFi Ecosystem

One of Lido’s biggest strengths lies in its integration with the broader DeFi ecosystem. stETH is now widely accepted as collateral and is actively used in protocols such as:

  • Aave: stETH can be supplied or borrowed
  • Curve: Liquidity pools with ETH/stETH pairs help maintain price parity
  • Yearn Finance: Vaults optimize yield strategies for stETH
  • Balancer: Used in liquidity pools and incentive programs

These integrations enhance the utility of stETH, making it not just a passive yield-bearing asset, but a productive piece of capital within DeFi.

Risks and Considerations

Like any DeFi product, Lido comes with certain risks:

  1. Smart Contract Risk: Lido’s system relies on smart contracts, which may have vulnerabilities.
  2. Slashing Risk: Although Lido spreads staking across multiple validators, poor performance or malicious behavior could still lead to losses.
  3. Centralization Concerns: With a large share of staked ETH routed through Lido, some critics argue this introduces centralization risks in Ethereum's consensus.
  4. Peg Volatility: stETH typically trades near 1:1 with ETH, but deviations can occur during market stress.

Lido has taken measures to mitigate these issues, including partnerships with top audit firms, implementing insurance buffers, and continuing efforts to decentralize validator operations.

Recent Developments and Lido V2

In 2023, Lido launched Lido V2, a major upgrade aimed at decentralizing staking further. Two key features were introduced:

  1. Staking Router: A modular system allowing anyone to propose new staking modules and validator sets.
  2. Withdrawals: For the first time, users could directly unstake ETH and receive ETH back, following the Ethereum Shapella upgrade.

These changes not only improved user experience but also pushed Lido closer toward a more decentralized, resilient architecture.

Conclusion

Lido Finance has played a pivotal role in making Ethereum staking more accessible, liquid, and composable. By unlocking staked capital through stETH and fostering deep integrations with DeFi protocols, it has created a new paradigm in staking—one that emphasizes utility, flexibility, and participation.