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On January 5, Lido, the Ethereum 2.0 pledge liquidity solution, announced the official launch of the governance token LDO and announced the token economic model. The original title of this article is “Ethereum 2.0 Opens Deposits, Understanding the Lido Design Architecture of Pledge Liquidity Protocol”, which was published on November 11, 2020.
Written by: Lido
On January 5, 2021, Lido, the Ethereum 2.0 pledged liquidity solution, announced the official launch of the governance token LDO for the management and network decision-making of Lido DAO. Currently, LDO has been distributed to Lido’s early pledgers. From the deployment of Lido to December 28, 2020, all pledgers, all stETH holders, Uniswap stETH/ETHLP token holders and yvsteth token holders are eligible to claim LDO tokens.
Token Economic Model
The total number of LDO castings is 1 billion. The officially announced token distribution plan is as follows:
The founding members of Lido DAO hold 64% of the tokens, which will be locked for one year and will be linearly unlocked after one year. Among the unlocked tokens:
- DAO treasury holds 36.32%
- Investors hold 22.18%
- Verifiers and signature holders hold 6.5%
- Early Lido developers hold 20%
- The founder and team hold 15%.
Learn all about Lido
Lido DAO is a community organization that builds liquid pledge services for Ethereum. It allows users to obtain pledge rewards without having to lock assets and run pledge nodes. The Lido pledge service will be launched simultaneously with the launch of Ethereum 2.0 Phase 0.
After depositing Ether to the Lido smart contract, the user will automatically receive an ERC20 standard stETH (staked ETH) token, which will serve as the user’s Ether storage voucher on the beacon chain and also reflect the validator’s Pledge rewards or punishments on the beacon chain. Users can only exchange stETH back for Ether with pledged rewards after the beacon chain has launched the transaction function. The exact launch time is currently to be determined, and it is conservatively estimated to be 18 months later. But before that, unlike the ether on the beacon chain, stETH can be used for transaction transfers.
The design of Lido is simple but not simple. The following will introduce the design composition, objectives and limitations of the system as easy as possible.
Design goals and limitations
Staking is carried out in the initial stage of Ethereum 2.0, which means that the risk of Ether being frozen for a long time is assumed. Only when Ethereum 2.0 allows the transfer operation (phase 1.5 or phase 2) can the ether be retrieved. The most optimistic estimate is next year. Before that, everyone could not get back the pledged Ether and rewards, and could not make transactions.
To run a node on the beacon chain, you need to pledge 32 Ethereum, obtain a validator’s public key and the address for withdrawals when they expire. Before the beacon chain allows transfer operations, validators can only initiate two operations on the chain: perform verification and stop verification. During this period, the pledger must run verification procedures at all times, and at the same time bear the risk of penalties that endanger the pledge principal due to improper configuration.
If the validator is fined for confiscation of income or makes a mistake in operation, it may lose the principal or reduce the income. If there is a bug in the code of the validator node or a problem with the network link, the above risks will occur. These risks make the Ethereum pledge verification work in phase 0 and phase 1 less attractive. Pledgers risk confiscation of income and freezing of funds and can only get general rewards.
What Lido does is to help users not only pledge Ether to get rewards, but also without freezing their tokens. Lido will become a decentralized infrastructure for the issuance of liquidity tokens, which are more flexible than native pledge tokens.
Lido’s primary vision is as follows:
- Allow users to obtain pledge rewards without completely locking up funds
- So that users do not have to pledge 32 integer multiples of Ether, any number
- Reduce the risk of confiscation caused by software failures or malicious third-party attacks during the pledge verification process
- Provide stETH tokens as development building blocks for other applications and protocols (for example, as collateral in lending agreements and other purposes in DeFi agreements)
- Provide a new pledge service in addition to exchange pledges, self-operating node pledges, and other semi-custodial pledges or decentralized agreements
The design of Lido follows the principle of simplicity and ease of use, and its governance relies on the community to complete. Changes in the agreement are also adjusted with the changes in the underlying blockchain mechanism.
The following is the framework description of the Lido pledge agreement:
- Pledge pool: used to manage deposits, pledge rewards and withdrawal operations
- Node operator registration
- Deposit certificate
- stETH: The liquid pledge token corresponding to the 1:1 ether on the beacon chain
- DAO: Manage various parameters in the agreement through Aragon DAO
The pledge pool contract is the core smart contract of the Lido protocol. The functions of the contract include the deposit and withdrawal of ether; the minting and destruction of stETH tokens; entrusting funds to node operators; extracting service fees for pledge rewards; accepting updates from the oracle contract. The management logic of node operators is handled separately by another contract, the NodeOperatorsRegistry contract.
The user sends ether to the staking pool, and the staking pool contract will be automatically minted and returned to stETH. The Ether received by the pledge pool contract will be uniformly distributed to validators for deposit verification. The withdrawal voucher corresponding to the ether is either hosted by a multi-signature distributed escrow, or when the withdrawal to eth1 addresses proposal is passed, an upgradeable smart contract will handle the withdrawal.
Node operators also verify transactions on the beacon chain. DAO selects node operators and adds them to the NodeOperatorsRegistry contract. Node operators that have passed the review need to perform verification operations to generate a series of keys, which are also provided to the NodeOperatorsRegistry contract. When the smart contract receives the Ether, it will be distributed to all active node operators in 32 Ether. The list of operators of the store node in the pledge pool, the corresponding keys and the logic of reward distribution.
The oracle contract is responsible for monitoring the balance of the verifier registered in the DAO on the beacon chain. The verifier’s balance may increase as the reward accumulates, or it may decrease as the penalty. The oracle is designated by the DAO, and its data is updated daily to provide users with an accurate stETH token balance. If a reward is obtained on the same day, a small part of stETH will be minted to reward node operators, while paying for DAO insurance and injecting capital into development funds.
stETH is an ERC20 token representing the pledge of ether on Lido. When the ether is deposited in the smart contract, stETH will be minted, and when the ether is withdrawn, stETH will be destroyed. stETH is always 1:1 with the Ether pledged in Lido. The total amount of stETH tokens will be updated after the oracle machine updates the total pledge data every day.
We believe that DAO is the best framework for publishing Lido. If we abandon decentralized governance, users can only trust the 1:1 correspondence between ETH and stETH under the risk of a single point of failure-just like we can only trust the 1:1 USDT issued by Tasda and backed by US dollars same.
In order to reduce the risk of users, we believe that it is better to distribute parameter governance rights to decentralized communities:
- Lido is highly dependent on the design and functional limitations of the beacon chain
- The pledge agreement of Ethereum 2.0 may also change, so Lido will also be set as an upgradeable smart contract
- An insurance provider must be selected in the ecosystem, and the insurance for fines and forfeitures needs to be negotiated and determined
- Lido’s upgrade relies on DAO governance to be more effective than a decision made by one person or development team
- The DAO model can bear the development and contract upgrade costs from the DAO token vault
DAO will accumulate service fees from Lido, and use DAO voting for insurance, development costs and other expenses.
As the launch is approaching, we welcome everyone to join in our open channel on discord. We believe that Lido can become an important cornerstone of the Ethereum ecosystem. If you want to build Lido with us, please send an email to: [email protected]
Or join our Discord channel.