Opinion

Everything You Should Know About Staked Ether

Lido Finance makes it possible for users to stake any amount of ETH.

By Rohas Nagpal | Updated: 29 June 2022 19:08 IST

Everything You Should Know About Staked Ether

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Staked Ether (stETH) is a token you get on a 1:1 basis when you stake with Lido

Before we start with Lido Staked ETH (stETH), it is important to understand 2 things - Beacon Chain and Lido. The 'beacon chain' is the base on which the Ethereum ecosystem hopes to become secure, sustainable, and scalable. As of now, the Beacon Chain runs in parallel to the mainnet and uses proof-of-stake and when the merge happens, the Ethereum mainnet will move to proof-of-stake. Ethereum staking currently requires a minimum of 32 ETH to be locked until after the blockchain upgrades to the new standard — Ethereum 2.0.

That's where Lido steps in. It is a liquid staking platform that lets users stake any amount of ETH. In return, users get stETH - a derivative token.

What is Staked Ether?

Staked Ether (stETH) is a token you get on a 1:1 basis when you stake with Lido.

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stETH represents your staked ETH and you can use your stETH to earn yields and lending rewards like regular ETH.

Your stETH balance is updated daily and is calculated as: initial deposit + staking rewards - penalties

Wondering what these penalties are? ETH validators are penalised if they fail to validate transactions.

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stETH can be thought of as a promissory note - stETH holders can redeem their tokens for an equivalent amount of ETH - 6 to 12 months after the upgrade or merge is completed.

Decoupling from ETH

stETH price has gone below that of ETH because of many reasons:

The fear created by the crash of the Terra project.
The halting of withdrawals by the major crypto lender Celsius.
Three Arrows Capital, a crypto hedge fund that is in financial trouble, is actively selling its stETH holdings.
The Curve liquidity pool for switching between stETH and ETH does not have adequate liquidity.

Since Celsius has over $400 million (roughly Rs. 3,141 crore) in stETH deposits, investors fear that it will have to sell its stETH and this will create additional downward pressure on stETH.

At the time of writing, stETH has fallen to 0.95 ETH - a discount of 5 percent to ETH.

Other risks

Some of the potential risks are:

You could lose your capital if the Lido smart contract is exploited.
ETH 2.0 is experimental and under development. You could lose your capital if any bugs in it are exploited.
You could lose your capital if ETH 2.0 fails to get adequate adoption.
Around 20 percent of the stake is held by multiple multi-signature accounts.
You could lose your capital if signatories lose their key shares or get hacked or go rogue.

You could lose your capital to staking penalties.

Remember, stETH can be withdrawn only when transfers and smart contracts are implemented on Ethereum 2.0.

Ethereum co-founder Vitalik Buterin feels that since Lido Finance holds 1/3 of staked ETH it could "theoretically disturb the Ethereum network post-Merge".

The project must have a large, vibrant, active, engaged, positive community with a fair share of fanatics. The major social platforms are Discord, Facebook, Instagram, LinkedIn, Medium, Reddit, Telegram, Twitter, and YouTube.

Rohas Nagpal is the author of the Future Money Playbook and Chief Blockchain Architect at the Wrapped Asset Project. He is also an amateur boxer and a retired hacker. You can follow him on LinkedIn.

Will crypto tax hurt the industry in India? We discuss this on Orbital, the Gadgets 360 podcast. Orbital is available on Spotify, Gaana, JioSaavn, Google Podcasts, Apple Podcasts, Amazon Music and wherever you get your podcasts.

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