Staking platform Lido’s pile of $12 billion worth of ether came online yesterday after the platform commenced staking withdrawals. Lido is Ethereum’s biggest staking platform, accounting for approximately 32% of all staked ether as of this writing.
Mass withdrawals from the platform could have had a catastrophic effect on ether price from individuals selling their withdrawn ether in crypto markets. But Ethereum has prevented that eventuality by instituting a staggered process that restricts the number of withdrawals per day. Ether price has not reacted significantly to Lido’s announcement and is trading at $1823.14, down 0.4% from a day earlier.
Plenty of Profits
The average purchase price for ether at Lido is above $2500, meaning those interested in selling their holding after withdrawing it will run a loss from the transaction. They might have to content themselves with profits accrued from staking rewards. Of those, they have had a windfall.
Lido has been amongst the top staking platforms for rewards, its practices sometimes inflating them even beyond those advertised on ethereum. The recent meme coin frenzy further multiplied those rates by jacking up transaction fees on ethereum and, subsequently, validator rewards for its execution layer. Lido witnessed a flurry of ether deposits during that time, according to Dune statistics.
Besides the rewards, Lido also offers other profit-making opportunities. One of them is through a market for trading positions in the withdrawal queue. While Ethereum already has a significant queue for staked tokens, Lido had promised quick withdrawals earlier this year. But it has changed its mind.
Isidoros Passadis, Master of Validators and Lido contributor, said trading of positions in the platform’s withdrawal queue is allowed. This will create a secondary market for queue positions. It also creates incentives for large stakers to multiply income by clogging the queue, and further delay withdrawals, while they wait for an increase in ether prices.
Buffered Ether
There is a way around the bureaucratic mess architected by Lido for withdrawals and it involves buffered ether. Lido has hidden away a stash of ether, amounting to 270,000 ETH (or, $490 million at current prices), in a withdrawal vault.
Where did that ether come from? It is simply “ether that hasn’t been staked or ether left over from validator rewards or from validators that are being exited.” If any one of those instances is true, then what is it doing on Lido’s staking platform?
Lido does not run validators and it is unlikely that they will share rewards, a valuable revenue stream for them, with the platform. Perhaps, this is another instance of Lido’s magical abilities to conjure up rewards and tokens out of thin air.
The Centralized ‘Decentralized’ Platform
Like other crypto platforms and exchanges, Lido is a beacon of decentralization. Like them it has also accorded to itself the power to cease vital customer operations.
The Lido withdrawal process is designed such that a Gateway Committee can stop customer withdrawals of staked tokens. What this means is that customer’s staked tokens can only be withdrawn at the committee’s discretion. Only members of the Lido decentralized autonomous organization (DAO) are part of the Gateway Committee.
But that’s not saying much, since ownership of Lido’s governance token, LDO, is fairly concentrated. The gate seal for this decision is controlled by a multisignature contract, available only to select signatories.
Most importantly, Lido has the signing keys – the equivalent of a private key for staking – for validator exits. This means that stakers cannot withdraw their tokens completely until Lido intervenes in the process and gives the go-ahead for validators to release the tokens.
The entire idea behind Lido as a staking platform was to simplify the process to stake ether and demonstrate the token’s appeal as an investment asset. But its janky economics, that allow validators to steal from users and inflate rewards, and withdrawal process have complicated the process.
DAOS to Grant Associations
Lido is the richest decentralized autonomous organization (DAO) – a flimsy non-profit construct to conduct an end run around regulators. It recently transitioned to becoming a grants association.
Aragon DAO was also in the news recently because it made a similar transformation in its structure. Aragon claims it made the change to escape attacks from an “activist” investor Arca capital. Their battle had all the drama of watching paint dry on a sunny day.
A Utility Token
Briefly, Arca wanted Aragon to conduct a buyback of its tokens from investors at market prices. [Investors get a discount if they get in on the ground floor of such sales]. Aragon refused and became a grants association instead. Quotable quotes were made, and Discord server bans took place. To think the entire affair was supposed to be communal and decentralized.
According to this Blockworks piece, the shadow play in the media actually hid the real dynamics behind the move, namely that the ANT token was supposed to be a utility token. The conversion to an association for a token that had “no stated social purpose” enabled the association to retain the utility token designation.
Meanwhile, back at DAO, its treasury holdings have crashed from $461.647 million in the middle of February to $299.764 million yesterday. The decline in its holdings has likely been accelerated by a selloff in its native governance token, LDO, by investors who probably have made handsome profits from the protocol’s cash flow and price rise.
The association has made remarkable progress at furthering its social mission since. For example, it made a grant to a developer as a thank you for developing a dashboard for Maximal Extractable Value (MEV), a front running practice that enriches validators at the expense of users.