Lido Staked ETH (stETH): All You Need To Know

After close to two years, Ethereum finally completed its transition in the Merge (previously referred to as Ethereum 2.0) in September 2022. Despite the transition, users were still unable to unstake their ETH. This would only be made possible during the Ethereum Shanghai upgrade that is expected to launch in March 2023. Of course, while the issue of illiquidity will be solved, staking on Ethereum is still a complex and expensive process. For instance, to help secure the Ethereum network, one has to lock at least 32 ETH up, which is quite a huge amount to leave lying around.

To provide a solution to the staking dilemma on Ethereum 2.0, Lido, a liquid staking solution, has built a platform that allows participants to lock any amount of ETH on the platform while retaining the liquidity of ETH through its token, stETH.  

Let’s learn more.

What is stETH?

stETH is a liquid staking derivatives token used to represent staked Ether on Lido (LDO) that allows the token holder to participate in various ecosystems in the DeFi niche while still accruing staking rewards from the Ethereum Beacon Chain.

Basically, for every ETH you stake on Lido, you receive one stETH. You can use stETH in a similar way as regular ETH due to its DeFi compatibility with platforms such as Curve, Aave, and Maker. You can sell it, spend it or even use it as collateral in crypto lending platforms. Further, you can use stETH to redeem your staked ETH once withdrawals are made possible with the completion of the Shanghai upgrade. 

How stETH Works

The mechanics of stETH are based on oracles and the rebase function. The stETH token balances are updated daily at 12PM UTC based on an oracle report on changes in the total staked ETH. Once a user stakes their ETH with Lido, they begin to receive daily rewards starting from the first day of staking. This is possible because Lido applies a socialized staking mechanism where the rebases affect all the stakers regardless of whether their ETH has been deposited into the queue. 

Since the rewards are pinned on the balance rebase, stETH token holders will only see an automatic change in their wallet balance without an accompanying transaction.

The rebase mechanics of stETH work across various DeFi platforms which implies if you spread stETH and stake it in these protocols, you’ll receive additional rewards.

You’ll realize that the stETH staking rewards are lower than those of the Ethereum Beacon Chain. This difference arises because there’s a queue from which all stETH holders are accruing rewards and only a handful of Lido validators have usually made it through the queue at the end of each day.

As a result, the reward rate is lower since the total rewards accrued from the handful of already accepted validators are split proportionally among all the ETH holders. However, the stETH reward rate will grow over time to correspond to that of the full ETH staking rate as more of Lido’s validators are activated. 

Source: Medium

stETH was brought forth by Lido as a staking solution for Ethereum. Lido seeks to solve the problem of illiquidity and inaccessibility that’s facing the Ethereum Beacon Chain. These problems have risen due to the adversarial incentives of accruing rewards by securing the chain through staking a high amount of ETH which can’t be withdrawn until transactions are enabled.

As a community-governed platform, Lido’s structure consists of a staking pool (complete with node operators, oracles and rewards), an insurance fund that stores stETH, and an Aragon-powered DAO. Lido charges a 10% fee from the staking rewards which are distributed between the DAO platform, node operators and the insurance fund.

What is stETH Used For?

stETH is a tokenized version of ETH staked on Lido. As such, it can be used in a similar way as ETH, especially in the DeFi ecosystem. stETH can be integrated into the following use cases:

Liquidity Pools

Providing liquidity through liquidity pools is critical in DeFi where automated market makers (AMMs) facilitate the seamless exchange of tokens. Lido has partnered with various DeFi liquidity pool providers such as Curve, SushiSwap, 1inch and Bancor to create utility for the stETH tokens. 

In general, liquidity providers are incentivized to provide liquidity to the liquidity pools through receiving pool trading fees and rewards in the form of LDO tokens and the native token of the DeFi protocol. 

Some DeFi platforms like SushiSwap and Bancor require you to wrap your stETH tokens into wstETH before depositing them into the liquidity mining pool. The wstETH tokens are non-rebasing and will not reflect daily changing rewards until you unwrap them.

Yield Farming

Another use case for stETH tokens is by yield aggregators which can integrate them as an additional layer of rewards to the already existing yield farming rewards.

Popular aggregators such as Harvest Finance and Yearn Finance use strategies to compound and maximize rewards for users by spreading their assets across multiple DeFi platforms such as Curve and SushiSwap.

Lending

stETH has also been integrated as a collateral asset on Aave, a crypto lending platform. Through Aave, stETH holders can use their tokens as lending collateral and still retain their Ethereum staking rewards while earning daily collateral rewards. In fact, stETH holders can effectively borrow ETH against their collateralized stETH and restake the ETH for more stETH.

Another platform where users can utilize their stETH is Inverse Finance which is powered by Anchor, a money-market protocol that allows the lending and borrowing of assets by issuing synthetic tokens. Note that Inverse Finance’s Anchor is different from Terra/Luna’s Anchor Protocol.

How Ethereum Merge Affects stETH

Lido provides ETH holders the opportunity to stake their ETH through stETH and earn passive income. Post Ethereum Merge, stETH remains valuable for the following reasons: 

• Lido offers a cheaper staking alternative as compared to the high minimum amount of ETH needed to stake in Ethereum post-Merge.

• Before the Ethereum Shanghai upgrade, users can’t unstake ETH but can swap stETH tokens on decentralized exchanges (DEXs) and use them for various DeFi purposes to earn more rewards as outlined above.

• Lido has undergone a special upgrade designed for the Merge. With this upgrade, there are additional rewards for validators who will also act as block proposers to receive priority fees.

• There is also a discussion among Lido’s community and node operators about the potential of distributing Maximum Extractable Value (MEV) rewards to validators and stakers.

How Ethereum Shanghai Upgrade Affects stETH

The much-awaited Ethereum Shanghai upgrade is expected to happen in March 2023. Following the upgrade, withdrawals will be enabled on the ETH staking contract which will significantly reduce the current risk associated with staking ETH. But what might possibly happen to stETH with this upgrade?

Even with the upgrade, there is a possibility for the demand for liquid staking to remain. This is because liquid representations of ETH such as stETH allow for quick entry and exit of positions in the market as compared to actual staked ETH. Further, as staking on Ethereum remains costly and difficult, stETH continues to act as an ideal alternative for most users as opposed to staking directly on the Beacon Chain after the Shanghai upgrade.

Additionally, those who are bullish on Ethereum may view stETH as an arbitrage opportunity considering the price disparity between the two. However, trying to catch such opportunities will require a significant amount of patience.

Is stETH a Good Investment?

So far, Lido has caught the attention of the crypto community and is among the leading providers of Ethereum liquid staking solutions in the market. stETH tokens provide an innovative approach to staking which contributes to decentralization and security on Ethereum and give ETH holders full control over their staked ETH.

Further, Lido is working on providing a fully permissionless and trustless staking solution. When implemented, the model will add to the critical role stETH plays in the growth of the DeFi ecosystem. It will ensure that staking on Ethereum is fully decentralized unlike staking on centralized exchanges which threatens Ethereum’s goal of decentralization. 

Back in June 2022, there had been escalating worries about Lido stETH’s decoupling from ETH following Luna’s crash. Investors feared that there would be a liquidity crisis with the widening gap in stETH and ETH’s value. Actually, as Lido’s stETH is backed 1:1 with staked ETH, it will not negatively affect ETH’s value. The exchange rate only reflects the secondary market price rather than the actual value of stETH as you will be able to redeem an equal amount of ETH that you staked once transactions are available on Ethereum. This is because Lido is not a stablecoin, so it will not cause a similar case of the algorithmic stablecoin TerraUSD de-pegging against the U.S. dollar that led to a crash of its sister token Luna.

The main function of stETH is to decentralize staking on Ethereum and solve the illiquidity in the Beacon Chain, which it seems to be effectively working toward thus far. Therefore, we feel that Lido stETH is a good investment due to its value proposition to DeFi's ecosystem and its ability to solve various staking limitations on Ethereum. Note that this is not financial advice, however, and you should always do your research before investing in altcoins.

Where To Buy stETH 

stETH is available for trading on leading cryptocurrency exchanges. You can buy stETH as a Spot Trading pair (stETH/USDT) on Bybit. You’ll need to sign up on Bybit and fund your account with USDT upon verification. Thereafter, proceed to the Bybit Spot Trading platform to place your order.

Closing Thoughts

Lido, through the provision of stETH, has been instrumental in creating liquidity for Ethereum after the Merge. As a liquid staking solution, Lido's stETH makes staked ETH liquid as Lido ETH stakers can participate in yield farming and even provide collateral on crypto lending protocols with stETH. Even with the Ethereum Shanghai upgrade, stETH will remain a key player in decentralizing and securing Ethereum thanks to its low barriers of entry which allows even users with low capital to stake their ETH.