From Lido to Geode, where will the staking protocol go in the Ethereum 2.0 era?

On June 10, 2022, the Ethereum 2.0 staking protocol Geode Finance announced that it had completed a US$3 million seed round of financing. This round of financing was led by Multicoin Capital, with participation from Eden Network, Yield Yak, GSR Markets, C² Ventures, and C² Ventures founder and managing partner Ciara Sun.

This round of financing also brought the long-dormant Ethereum decentralized staking protocol back into our sight.

Ethereum 2.0, from PoW to PoS

As we all know, Ethereum is undergoing a major transformation, namely the transition from PoW to PoS.

Currently, Ethereum's proof-of-work mechanism is still PoW, which consumes a lot of energy and relies on miners (powerful computer systems) to verify transactions. Miners win the privilege of verifying transactions and are rewarded with ETH tokens by solving complex equations. Mining is a profitable business for investors with deep pockets, but it is not the case for ordinary users.

But PoS Staking may change this. It stakes ETH into the Ethereum network and participates in the task of verifying transactions. Stakers will receive ETH tokens as rewards like miners. However, it takes at least 32 ETH (about $108,000) to become a validator and run a node in the Ethereum network.

Since the launch of the ETH 2.0 contract in December 2020, many ordinary users are no longer willing to lock up 32 ETH directly. The merger time of PoS and PoW has not yet been determined. Currently, ETH can only flow from the PoW chain to the PoS chain in one direction. Therefore, ETH deposited in the early stage will face the risk of losing liquidity and being unable to be retrieved.

Looking back, in the early days of the Ethereum PoS beacon chain, early entrants developed rapidly due to their first-mover advantage. The mainstream model at that time was still the centralized staking protocol. For institutions, this choice is not difficult, because once they give up the characteristics of trustlessness, decentralization or permissionlessness, they will get rich returns at a lower cost. Therefore, the giants of the Web2 world in the traditional model, such as Coinbase, Kraken, Binance and other companies, are very happy to lock up the funds of voluntary users. But it must be said that people at that time really had no choice but to rely on centralized institutions and run their own nodes, but the latter seemed too arduous for most people. Therefore, the problems of PoW mining pools have to be staged again and again, and they are still repeating.

But no matter what period, there will always be forces committed to promoting changes in the world. In this context, another force is also growing stronger.

The Beginning of a Decentralized Staking Protocol — Lido

The decentralized staking protocol Lido was born at this time, and its liquidity staking token stETH appeared. stETH is the first and currently dominant liquidity staking token. For the first time, anyone on the Ethereum network can stake less than 32ETH while retaining control of their funds. Imagine how fast such a DAO (Lido DAO) that seeks to bring benefits to the majority can develop without the blatant trust assumptions of CEXs.

Lido Finance is a platform based on Ethereum 2.0. Users can get staking rewards without locking up ETH, and will get stETH tokens at a 1:1 ratio to participate in other services in the DeFi market. Compared with the requirement that users who stake the beacon chain must lock up at least 32 ETH, this will make the use of funds very flexible.

Lido Finance is a liquidity staking protocol created in October 2020. Simply put, it allows users to stake POS (Proof of Stake) cryptocurrencies without locking them, which means that users can trade them freely while staking. When users stake their cryptocurrencies through Lido Finance, the protocol will provide them with a tradable token as a receipt for the staked cryptocurrency. When users stake ETH on Ethereum's Becon chain (the Ethereum blockchain that ensures the Ethereum 2.0 expansion) through Lido Finance, the protocol will provide them with a token called wstETH or stETH, which will reflect the price of ETH and trade.

It is worth noting that the Lido community is actively adding new Becon chain validators. These newly added Becon chain validators will receive 5% staking rewards from the Lido Finance platform.

After the establishment of Ethereum Becon chain in December 2020, Lido Finance was officially launched, and the LDO token was officially launched in January of the following year. LDO is an ERC20 token on the Ethereum blockchain with a maximum supply of 1 billion, all of which are minted at genesis. The use case of LDO tokens is currently limited to voting in Lido DAO. About 36% of the supply goes to Lido's Treasury, about 22% goes to investors, 6.5% goes to early validators and signature holders, 20% goes to early developer Lido Finance, and 15% goes to founders and future employees.

I think Lido has the following advantages:

1. Lower the capital threshold and reduce cost losses

As mentioned above, staking ETH in ETH 2.0 to get rewards requires a capital threshold, that is, at least 32 ETH is required. Lido allows users to lock any amount of ETH to participate in ETH 2.0 staking, and there is no need to lock it, thereby lowering the capital threshold for participation.

In addition, Lido also reduces the loss of capital costs to a certain extent. This is because there is a Slashing penalty mechanism in ETH 2.0. If the verification node pledge management is improper, the triggering mechanism may be triggered, resulting in the loss of the pledged principal. Based on Lido, the capital loss caused by this penalty mechanism can be effectively reduced.

2. Using DAO governance to improve transparency

Relevant personnel from a16z once said that DAO governance is a relatively outstanding design in the Lido project. The selection of Lido nodes must be approved by the Lido DAO. Members decide the selection of verification nodes through voting, and the DAO completes the research and supervision of the nodes. This greatly improves the security and transparency of Lido.

3. Support multiple main chains

Although Lido Finance is a project that emerged to address the staking problem of ETH 2.0, Lido is not limited to the Ethereum chain. Lido has been expanding and hopes to expand its staking services to more chains.

Of course, Lido also has disadvantages, which can be summarized as follows:

1. Penalty mechanism

Lido is a platform built on Ethereum 2.0 Beacon Chain (a new proof-of-stake blockchain). Its principle is to collect tokens pledged by users and store them on the Beacon Chain. However, it has a reward and penalty mechanism. When a Rebase occurs, the supply of tokens will increase or decrease algorithmically based on the staking rewards in the Beacon Chain. When the oracle reports Beacon statistics, a Rebase will occur.

2. Unstable income

The balance of stETH will be updated at 24:00 UTC every day. If the balance of stETH increases, the user can get a certain amount of rewards; but if the user's stETH balance decreases, he will also lose a certain amount of stETH. However, it should be emphasized that the annualized return on staking on Lido is 4.5% (staking ETH), which does not conflict with the rewards and penalties on the Beacon Chain, and the two are calculated separately.

3. Gas fees may be higher for small users

A new option for decentralized staking protocols - Geode Finance

Geode Finance is an Ethereum 2.0 staking protocol that is committed to creating a new model for liquid staking. Through the Proof of Stake (PoS) mechanism, all ETH can generate income, whether it exists in a smart contract, a DAO treasury, or someone's wallet. Geode's goal is to achieve this while providing a truly decentralized solution.

Essentially, any protocol that uses wrapped Ether (wETH) can use it to create validators and earn rewards from validator rewards. However, setting up a protocol that allows users to run their own validators is undoubtedly quite challenging.

Relying on traditional ETH 2.0 staking protocols requires trust between protocols because they usually work in a centralized manner. This model has caused most protocol treasuries to miss out on additional returns, or only use a portion of their treasury for traditional ETH 2.0 staking protocols, thereby taking on inherent third-party risks. There has been a lack of effective solutions to this problem.

In response, Geode Finance unlocks the potential for DAOs to earn yield on their ETH, thereby bringing more benefits to their users and more benefits to the DAO itself. This is undoubtedly a win-win for projects that want to monetize ETH without third-party fees and be able to customize their own risk profile.

The advantages of Geode Finance are:

1. Provide users with opportunities for additional income and increase TVL.

2. Monetize the ETH in the treasury without third-party fees or risks.

3. Support bringing the project’s own governance methods into the ecosystem, which is more targeted.

4. Full control over the withdrawal contract, so funds will be safer.

5. Users can manage their own risk profile by choosing their own node operators.

6. Users can benefit from LP opportunities for their own ETH 2.0 tokens.

Conclusion

The Ethereum 2.0 staking protocol is an application that is quite in line with the Web3 era. As Ethereum is currently undergoing a major transformation from PoW to PoS, it may usher in a new opportunity for development.

The two companies we are introducing today, Lido Finance and Geode Finance, are the new and old forces in the Ethereum 2.0 staking protocol. Needless to say, time and data have shown that Lido Finance is strong, and it can even be said that it is the undisputed leader in this field. Geode Finance, on the other hand, is much younger, and we can see many traces of Lido Finance in it, but Geode Finance also has some innovations of its own. However, the actual effect and market recognition are still unknown, so we can keep paying proper attention.