Thread by The DeFi Titan⚔️
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- Apr 16, 2022
- #DecentralizedFinance
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My 100-day defi-twitter challenge Day 5
Defi fundamentals - The new chapter of @LidoFinance
Here is a thread 🧵:
Defi fundamentals - The new chapter of @LidoFinance
Here is a thread 🧵:
1/ Why you should read this thread
@LidoFinance solves the problem of staking in the ETH2.0.
As Lido dominates the ETH2.0 staking market, people are worried about the vulnerabilities of its DAO structure.
If you want to stake your ETH in Lido, then this thread is for you.
@LidoFinance solves the problem of staking in the ETH2.0.
As Lido dominates the ETH2.0 staking market, people are worried about the vulnerabilities of its DAO structure.
If you want to stake your ETH in Lido, then this thread is for you.
2/ What is Lido
Lido is a liquid staking protocol that allows users to earn staking rewards on the Beacon chain without locking their ETH.
If you deposit one ETH to Lido, Lido will stake one ETH on the Beacon chain, and you get one stETH.
Lido is a liquid staking protocol that allows users to earn staking rewards on the Beacon chain without locking their ETH.
If you deposit one ETH to Lido, Lido will stake one ETH on the Beacon chain, and you get one stETH.
3/ Beacon Chain
Beacon chain is a blockchain for Ethereum to experiment with its proof-of-stake system.
Users can deposit 32 ETH to the ETH2 deposit contract(etherscan.io/address/0x00000000219ab540356cbb839cbe05303d7705fa), and run a node to validate transactions on the Beacon chain.
In return, they receive ETH.
Beacon chain is a blockchain for Ethereum to experiment with its proof-of-stake system.
Users can deposit 32 ETH to the ETH2 deposit contract(etherscan.io/address/0x00000000219ab540356cbb839cbe05303d7705fa), and run a node to validate transactions on the Beacon chain.
In return, they receive ETH.
4/ Why do we need Lido
Due to the nature of ETH2 deposit contract, once deposited, the ETH can only be withdrawn until the Merge is finished.
Considering that 32 ETH is a lot of money, the barrier of entry is quite high. Also, not everyone has the infra to run a node.
Due to the nature of ETH2 deposit contract, once deposited, the ETH can only be withdrawn until the Merge is finished.
Considering that 32 ETH is a lot of money, the barrier of entry is quite high. Also, not everyone has the infra to run a node.
5/ More ETH staked = More secured network
With less ETH staked, attackers can easily acquire ETH to break the network.
20% ETH staked -> acquired another 40% of ETH to take control
60% ETH staked -> 66% of stETH needed to take control
With less ETH staked, attackers can easily acquire ETH to break the network.
20% ETH staked -> acquired another 40% of ETH to take control
60% ETH staked -> 66% of stETH needed to take control
6/ How Lido works - 1
When depositing ETH, an equal amount of stETH will be minted to the depositor.
A node operator can add their signing key to become a validator.
The LidoDAO will vote for node operators for their eligible staking amount through Aragon.
When depositing ETH, an equal amount of stETH will be minted to the depositor.
A node operator can add their signing key to become a validator.
The LidoDAO will vote for node operators for their eligible staking amount through Aragon.
7/ How Lido works - 2
After collecting a pool of ETH from depositors and a list of signing keys from node operators, the protocol will deposit ETH to Beacon Chain by calling the ETH2 deposit contract.
After collecting a pool of ETH from depositors and a list of signing keys from node operators, the protocol will deposit ETH to Beacon Chain by calling the ETH2 deposit contract.
8/ How Lido works - 3
Before depositing, there is a security check in the DepositSecurityModlue.sol.
The protocol will check if the deposit root passing from the ETH2 deposit contract is equal to their deposit root.
Before depositing, there is a security check in the DepositSecurityModlue.sol.
The protocol will check if the deposit root passing from the ETH2 deposit contract is equal to their deposit root.
9/ How Lido works - 4
The root check is crucial because the difference in two deposit roots means the deposit of a certain key has been called before Lido places ETH into Beacon Chain.
Here is a medium post about the issue in Lido and @Rocket_Pool:
medium.com/immunefi/rocketpool-lido-frontrunning-bug-fix-postmortem-e701f26d7971
The root check is crucial because the difference in two deposit roots means the deposit of a certain key has been called before Lido places ETH into Beacon Chain.
Here is a medium post about the issue in Lido and @Rocket_Pool:
medium.com/immunefi/rocketpool-lido-frontrunning-bug-fix-postmortem-e701f26d7971
10/ How Lido works - 5
Due to the design of Beacon Client(validator software), anyone who deposits first with more than 1 ETH can set the withdraw credential(the withdraw address of ETH) of the validator signing key.
It means front-runner can control 32 ETH with only one ETH.
Due to the design of Beacon Client(validator software), anyone who deposits first with more than 1 ETH can set the withdraw credential(the withdraw address of ETH) of the validator signing key.
It means front-runner can control 32 ETH with only one ETH.
11/ How Lido works - 6
After depositing ETH to Beacon Chain, there will be oracles maintained by Lido reporting ETH balance on Beacon Chain.
When a report from oracle is received, stETH will be minted if the ETH balance increases, and vice versa.
After depositing ETH to Beacon Chain, there will be oracles maintained by Lido reporting ETH balance on Beacon Chain.
When a report from oracle is received, stETH will be minted if the ETH balance increases, and vice versa.
12/ How Lido works - 7
10% of staking rewards(increased ETH balance) will be fee keep by Lido. 50% of the fee will go to node operators, and 50% will go to the insurance fund for future emergency events.
90% of rewards will be used to rebase stETH.
10% of staking rewards(increased ETH balance) will be fee keep by Lido. 50% of the fee will go to node operators, and 50% will go to the insurance fund for future emergency events.
90% of rewards will be used to rebase stETH.
13/ How Lido works - 8
The rebasing of stETH happens secretly. The protocol will adjust add ETH received and recalculate everyone's share.
After rebasing, a holder's balance will change when showing Metamask or querying from Etherscan.
The rebasing of stETH happens secretly. The protocol will adjust add ETH received and recalculate everyone's share.
After rebasing, a holder's balance will change when showing Metamask or querying from Etherscan.
14/ LidoDAO
The LidoDAO decides on Lido’s key parameters (e.g. fees, vote for validators, and executes Lido upgrades for future change from Beacon Chain.
Any proposal of LidoDAO can be voted/vetoed by LDO, the governance token of Lido.
The LidoDAO decides on Lido’s key parameters (e.g. fees, vote for validators, and executes Lido upgrades for future change from Beacon Chain.
Any proposal of LidoDAO can be voted/vetoed by LDO, the governance token of Lido.
15/ Lido = Curve in MEV? - 1
When ETH adopts POS, block production will be decided by validators.
On top of the staking reward, there will be revenue from MEV.
Since LDO can decide the pool of validators, as ETH staked in Lido increases, Lido becomes the Curve in MEV.
When ETH adopts POS, block production will be decided by validators.
On top of the staking reward, there will be revenue from MEV.
Since LDO can decide the pool of validators, as ETH staked in Lido increases, Lido becomes the Curve in MEV.
16/ Lido = Curve in MEV? - 2
Currently, almost 1/3 of ETH($10B TVL) in Beacon Chain is controlled by Lido's validator.
With an $800M market cap, LDO is able to vote for validators that can potentially control $10B in ETH2.0.
LDO = mevCVX?
Currently, almost 1/3 of ETH($10B TVL) in Beacon Chain is controlled by Lido's validator.
With an $800M market cap, LDO is able to vote for validators that can potentially control $10B in ETH2.0.
LDO = mevCVX?
17/ The new chapter of Lido
To prevent the single point of failure in any validator(e.g. Ronin) and improve the quality of validator sets, Lido announced two future improvements to solve the problems in yesterday's tweet.
To prevent the single point of failure in any validator(e.g. Ronin) and improve the quality of validator sets, Lido announced two future improvements to solve the problems in yesterday's tweet.
18/ Distributed Validator Technology(DVT) - 1
The first improvement that Lido announced is the gradual adoption of DVT.
DVT is a technology to pool a set of validators together and represent the set as one validator.
The first improvement that Lido announced is the gradual adoption of DVT.
DVT is a technology to pool a set of validators together and represent the set as one validator.
19/ Distributed Validator Technology(DVT) - 2
DVT can reduce the risk of theft by sharing a piece of key with each validator, and increases the diversity of the validator pool.
Lido will pair untrusted NOs(node operator) with a majority of trusted NOs.
DVT can reduce the risk of theft by sharing a piece of key with each validator, and increases the diversity of the validator pool.
Lido will pair untrusted NOs(node operator) with a majority of trusted NOs.
20/ Distributed Validator Technology(DVT) - 3
This way, the validator sets will be more independent and decentralized.
Also, with more diverse validators, a score can be introduced to predict the quality of a validator, and thus Node Operator Score (NOS)
This way, the validator sets will be more independent and decentralized.
Also, with more diverse validators, a score can be introduced to predict the quality of a validator, and thus Node Operator Score (NOS)
21/ Node Operator Score(NOS)
Before DVT and NOS, it's reversible once a validator is allocated ETH to stake. There is no room for withdrawal.
With NOS, untrusted NOs can gain more allocation for performing well, this motivates NO and improves the overall quality of validators.
Before DVT and NOS, it's reversible once a validator is allocated ETH to stake. There is no room for withdrawal.
With NOS, untrusted NOs can gain more allocation for performing well, this motivates NO and improves the overall quality of validators.
22/ Personal thought on Lido - 1
The biggest vulnerability of Lido is its centralization of validators.
But looking at its incentive structure, I think it's hard to profit by manipulating validators.
Validators earn a 10% fee from rewards, they are better off doing good jobs.
The biggest vulnerability of Lido is its centralization of validators.
But looking at its incentive structure, I think it's hard to profit by manipulating validators.
Validators earn a 10% fee from rewards, they are better off doing good jobs.
23/ Personal thought on Lido - 2
If the Lido team wants stETH to become the unit of Defi, it has to maintain the core value of its protocol - provide quality sets of validators.
Therefore, I think the permissionless liquid staking is on its way.
If the Lido team wants stETH to become the unit of Defi, it has to maintain the core value of its protocol - provide quality sets of validators.
Therefore, I think the permissionless liquid staking is on its way.
24/ Final words
Liquid staking provides by @LidoFinance improves not only the staking rate of ETH but also Terra, Solana, etc.
The more people stake, the more secured networks become. I look forward to its path and the Merge.
Liquid staking provides by @LidoFinance improves not only the staking rate of ETH but also Terra, Solana, etc.
The more people stake, the more secured networks become. I look forward to its path and the Merge.
Special thanks to @Justa68004020 for tracing code of Lido with me, @LidoFinance for building such great service, and @_vshapovalov @hasufl for the great article about staking derivatives.
Lido official tweet:
On Staking Pools and Staking Derivatives - Paradigm:
www.paradigm.xyz/2021/04/on-staking-pools-and-staking-derivatives
On Staking Pools and Staking Derivatives - Paradigm:
www.paradigm.xyz/2021/04/on-staking-pools-and-staking-derivatives
This is the fifth tweet of my 100-day defi-twitter challenge. Comments are appreciated. If you like my tweet, please retweet and follow me!
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Hasu @hasufl
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Apr 26, 2022
Saw it, good thread!