Understanding Ethereum 2.0, Staking, and Lido’s $5.9B TVL Dominance

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Ethereum’s transition to Proof-of-Stake (PoS) represents one of the most significant upgrades in blockchain history. This shift, often referred to as Ethereum 2.0, introduces new mechanisms for network security, participation, and earning opportunities. Among the key players enabling this transition is Lido, a liquid staking protocol that has recently surpassed MakerDAO to become the largest DeFi protocol by Total Value Locked (TVL), with over $5.9 billion in assets. This article breaks down what Ethereum 2.0 entails, how staking works, and why services like Lido are gaining massive traction.

What Is Ethereum 2.0?

Ethereum 2.0, also known as Serenity, is a multi-phase upgrade aimed at improving the scalability, security, and sustainability of the Ethereum network. The most notable change is the move from Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus. Unlike PoW, which relies on computational power, PoS validators are chosen to create new blocks and validate transactions based on the amount of cryptocurrency they hold and are willing to "stake" as collateral.

Key Milestones in the Ethereum 2.0 Journey

  1. Beacon Chain Launch (December 1, 2020): The Beacon Chain introduced PoS to Ethereum, running in parallel to the main PoW chain. It began processing attestations and managing the validator registry but did not handle mainnet transactions. From its launch, users could stake ETH to earn rewards, though these funds remained locked.
  2. The Merge (September 15, 2022): This event marked the official transition, where the Ethereum mainnet merged with the Beacon Chain. The network ceased PoW mining and fully adopted PoS consensus.
  3. Shanghai Upgrade (Expected in 2023): This upcoming upgrade is crucial as it will enable the withdrawal of staked ETH and accumulated rewards, which have been locked since the Beacon Chain’s inception.

It is important to note that The Merge was solely a consensus change. It did not directly improve network throughput or reduce gas fees. Scalability improvements are expected from future upgrades, such as sharding (e.g., EIP-4844), which will be implemented post-merge.

How Does Ethereum Staking Work?

In Ethereum’s PoS system, users can become validators by staking 32 ETH. Validators are responsible for proposing new blocks and validating transactions. In return, they earn rewards, currently offering an Annual Percentage Rate (APR) of around 4.8%. However, this native staking model comes with significant requirements and risks.

Challenges of Solo Staking

Due to these challenges, most participants opt for alternative staking methods.

Alternative Staking Models

To make staking more accessible, the ecosystem has developed several models beyond solo staking.

Staking-as-a-Service (stSaaS)

stSaaS providers handle the operational complexities of running a validator node. Users still need to stake 32 ETH and generate their validator keys, but they delegate node maintenance to a third-party operator for a service fee. This model reduces the technical barrier but introduces reliance on the operator’s reliability. Key health indicators for evaluating stSaaS providers include:

Pooled Staking (Liquid Staking)

Pooled staking protocols like Lido eliminate the 32 ETH requirement by allowing users to contribute any amount of ETH to a shared staking pool. In return, users receive a liquid staking token (e.g., Lido’s stETH) representing their stake and accrued rewards. These tokens can be traded, used as collateral, or further invested in other DeFi protocols, providing immediate liquidity unlike locked staking rewards.

Exchange Staking

Centralized exchanges (CEXs) like Coinbase, Kraken, and Binance offer staking services by pooling user funds. They function similarly to pooled staking but are centralized entities. The key difference is that pooled staking in DeFi is trust-minimized and operates via smart contracts, while CEX staking is custodial.

Lido: The Liquid Staking Leader

Lido has emerged as the dominant force in liquid staking, with over 4.8 million ETH staked—approximately 30% of all staked ETH. Its success stems from solving key user pain points.

How Lido Works

  1. Users deposit ETH into Lido’s smart contracts.
  2. In return, they receive stETH tokens at a 1:1 ratio, which represent their staked ETH and rewards.
  3. Lido delegates the pooled ETH to a curated set of professional node operators via a stSaaS model.
  4. stETH holders earn staking rewards (currently ~4.4% APR) and can use their stETH across DeFi for additional yield.

Lido generates revenue by taking a small commission on the staking rewards. The native staking APR is ~4.8%, and Lido offers ~4.4%, pocketing the 0.4% difference. With billions in TVL, this creates a substantial revenue stream.

The stETH Token: Features and Dynamics

stETH is a rebasing token, meaning its balance increases daily to reflect staking rewards. It is designed to be pegged 1:1 to ETH in value. However, as a derivative, its market price can deviate from this peg due to:

Addressing Common Concerns

Will the Shanghai Upgrade Cause a Sell-Off?

With over 15 million ETH staked, there is concern that unlocking these funds could depress ETH’s price. However, several mechanisms mitigate this risk:

Is Lido Too Centralized?

While Lido controls 30% of staked ETH, the funds are not held by Lido but are locked in the Ethereum consensus layer. The centralization risk lies in Lido’s role in curating node operators. The community actively debates this, and efforts are underway to further decentralize the operator set.

Frequently Asked Questions

What is the difference between Ethereum and Ethereum 2.0?
Ethereum 2.0 refers to the suite of upgrades, most notably the transition to Proof-of-Stake, aimed at making the network more scalable, secure, and sustainable. The core blockchain remains the same.

Can I unstake my ETH before the Shanghai upgrade?
No, staked ETH and rewards are locked until the Shanghai upgrade is completed. This is a protocol-level constraint.

Is staking with Lido safe?
Lido is a widely used protocol that has undergone multiple audits. However, as with any DeFi protocol, there are smart contract risks. Its use of a curated operator set also introduces some trust assumptions.

Why does stETH sometimes trade below ETH?
stETH is a derivative token whose value is tied to the future ability to redeem it for ETH. Market sentiment, expectations about the Shanghai upgrade, and overall liquidity can cause it to trade at a slight discount or premium.

What are the advantages of liquid staking over exchange staking?
Liquid staking through DeFi protocols like Lido is non-custodial and provides liquidity via staking tokens. Exchange staking is simpler but is custodial and typically does not offer liquid tokens for use in DeFi.

How do I choose a staking service?
Consider factors like reputation, fees, decentralization, smart contract audits, and whether you value liquidity (via liquid staking tokens) or simplicity (via an exchange). 👉 Explore advanced staking strategies to make an informed decision.

Conclusion

Ethereum’s shift to Proof-of-Stake is a foundational change that opens up new avenues for participation and yield generation. While solo staking has high barriers, services like Lido have democratized access through liquid staking, fueling its rise to the top of the DeFi TVL rankings. Understanding the mechanics of staking, the different models available, and the associated risks is crucial for anyone looking to participate in the new Ethereum economy. As the network continues to evolve with upgrades like Shanghai, the staking landscape will undoubtedly become even more dynamic.