stETH token is a tokenized version and the liquid alternative of staked Ether released by Lido decentralized finance and staking protocol. It was launched in December 2020 and paved the road of Eth 2.0 into decentralized finance as it was the first liquid Ethereum staking solution. DAO allows Ether holders to support Ethereum 2.0 without losing liquidity.
The Lido DAO is a Decentralized Autonomous Organization that was created to build a liquid staking protocol for Ethereum. The platform governs a set of liquid staking protocols, while the community makes decisions on their key parameters, performs protocol upgrades for efficient and stable work.
The goal of the project was to let members of the ecosystem earn rewards via staking without locking Ether altogether. The team also tries to make these rewards available for users with any amount of deposit without restrictions. The platform wanted to make the stETH tokens building blocks for other protocols and apps, for instance, use them as collateral in lending and other solutions of decentralized platforms.
The DAO structure was chosen when founders looked at centralized and decentralized facilities. The choice is justified because it was easier to deploy the competitive products on the basis of such a structure. There are other reasons for the selection of DAO structure, such as the opportunity to preserve the upgradability and stability of the platform’s tokens.
It has become an optimal solution as it depends on the Ethereum beacon chain, its development, and staking protocol. When Eth2.0 was rolled out, there were a lot of uncertainties around it, therefore, it was necessary to keep Lido flexible. Also, accumulation and management of the service fees are easier when done with a DAO-based governance approach. It is more transparent and made in the interests of the community.
The developers decided that a distributed custody based on threshold signatures is a better approach for Lido. The choice of validators helps the members of the community to avoid ETH hostage. Only reputable node operators perform this kind of work on Lido, which are carefully selected by users. Such companies as Certus One, Chorus One, StakeFish, p2p.org, Staking Facilities wanted to become initial operators in Lido, so the interest of the crypto community in the project is huge. The Chorus One team offered to develop a Lido-operated liquid staking protocol on Solana.
The members of the Lido DAO community can stake their ETH tokens and get stETH tokens instead in a transparent, secure, and non-custodial manner. Staking helps to improve the stability of the Ethereum ecosystem.
Compared to staked ether, the stETH token doesn’t have limitations associated with the lack of liquidity. The members of the community depositing Ether into Lido to stake for Eth 2.0 get stETH instead. So an Ether holder sends Ether into the Lido liquid staking smart contract and then gets the corresponding amount of stETH tokens.
stETH tokens can be converted to ETH at any time. The members of the community can hold, trade, or sell these tokens. The stETH token balance is calculated based on the amount of staked ether, along with rewards and slashing penalties deducted from the amount.
Taking into account that the beacon chain is a different network, Lido smart contracts don’t have access to the data of the beacon chain. For this reason, the platform uses Lido DAO appointed oracles to communicate with them. The oracles perform monitoring work of node operators’ beacon chain accounts and then provide the corresponding data to Lido’s smart contracts. Each time they do it, the stETH token ratio is calculated again. The recalculation helps to determine the profit that can be received in case staking rewards are higher than the slashing penalties. When profit is obtained, it affects the stETH token balances, and Lido applies a 10% fee by minting the stETH tokens. The distribution of the minted tokens takes place between the node operators and the DAO’s treasury account.
The platform also has the governance token Lido also called LDO. It enables getting more liquidity in ETH. Only LDO holders have a vote in the Lido DAO. The voting weight of a community member is proportional to the number of tokens held.
The Lido team cares about the security of the platform. The open-source code is often reviewed and audited by independent companies. The staking risk is minimized thanks to elected, best-in-class validators.
The team decided to introduce a non-custodial staking service to remove risk. Also, DAO governance decisions help to reduce the management risk. Staking is performed across several validators that also removes possible problems.