Lido Staking Pool: Is it Safe?

What is Lido?

  • Staking pool that allow users to stake their ETH – without locking assets or maintaining infrastructure
  • When staking Lido you mint staked tokens (stETH) which are pegged 1:1 to your initial stake. Therefore, if you want to stake 1 ETH, you transfer your 1 ETH into the pool and you’ll receive 1 stETH in return
  • stETH will earn you daily staking rewards, but the rewards you earn are not re-invested. Therefore, your returns will not compound
  • stETH is a token that represents staked ether in Lido, combining the value of initial deposit + staking rewards. stETH tokens are minted upon deposit and burned when redeemed
  • Lido is the largest Ethereum pool with more than $5 billion staked as of Oct 17, 2021
Source: https://pro.nansen.ai/eth2-deposit-contract

Benefits of Lido

  • No lock up periods. You can exchange stETH back to ETH anytime. I have personally done this using ParaSwap on my ledger
  • Average Fee: Lido charges a 10% commission, which isn’t the lowest in the industry but is not outrageous like the 25% fee charged by Coinbase
  • Daily Rewards:stETH is paid out daily so there’s no worry that the rewards won’t be paid out
  • Stake from Ledger: Stake your ETH directly from your cold wallet. I use Ledger myself and I like the convenience of staking the crypto and have everything centralized within my Ledger account
  • Additional Yield: You could put your stETH to work in Yearn Finance to provide additional returns
  • No Minimums: There is no minimum requirement to stake with Lido, but it does you transferring your ETH into the Lido. This means you will be paying a transaction fee and with gas fees so high today, this might end up to $30 – $100 in transaction costs.

Is it Safe?

  • Lido uses a unique “distributed custody” solution in which the withdrawal key for all of the network’s validators has been split into 11 different parts secured by 11 different participants
  • The 11 participants include very big names in the crypto scene: Chorus One, Staking Facilities, Certus One, Argent, Banteg (yearn.finance), Alex Svanevik (Nansen), Anton Bukov (1inch), Michael Egorov (Curve/Nucypher), Rune Christensen (MakerDAO), Will Harborne (DeversiFi) and Mustafa Al-Bassam (LazyLedger)
  • Service is non-custodial, which means we never have access to your withdrawal credentials and it is therefore impossible for Lido to access your staked funds
  • stETH isn’t pegged perfectly 1:1 to ETH, but it’s usually less than a percentage point off. See stETH/ETH conversion history here.
  • Additional risks stated by Lido
  • The only Ethereum stakers who are truly safe from hackers are the ones with 32 ETH and can run a validator node. Everyone else has to either assume risk from cefi or defi third parties, or just hodl and hope that market gains outpace dilution

Lido Triggers Capital Gains?

  • Swapping your ETH for stETH triggers a taxable event (potentially, up for discussion)
  • The way Lido works, they are selling you another token. It’s not ETH or ETH2.0 it’s their own created token that you can sell on other exchanges and has a different governance. You swap your ETH for that token. That is a taxable event.
  • In Canada, according to the CRA: disposition is also defined as trade or exchange cryptocurrency, including disposing of one cryptocurrency to get another cryptocurrency
  • If you have been holding ETH for a long time, it might not be beneficial to stake with Lido as it might trigger a taxable event and depending on your gains, you might owe the CRA/IRS a substantial tax liability
  • This is still a grey area, and it depends whether swapping ETH for stETH counts as a disposition or is it a crypto swap in which the tax code is not clear on how that is treated today

Lido after ETH 2.0

  • Can continue staking and earn yield on stETH
  • If you choose you redeem your stETH, it will be converted for ETH in a 1:1 ratio and the stETH used will be burned from the network

My Thoughts

  • Personally, as a miner, I have been transferring my ETH into Lido after every payout
  • I’m a long-term holder of ETH and plan on holding onto ETH for years to come. Wanted to hedge my risk because no one can predict when ETH 2.0 will actually launch.
  • Not a big fan of the taxable event, but I didn’t want my ETH to sit in my ledger
  • I had thoughts of earning yield on lending platforms like Celsius or staking directly on exchanges but I didn’t want to manage my crypto outside my ledger
  • The long-term plan is to become my own validator by either building a node by myself or leveraging services like RocketPool when ETH 2.0 launches

If you want to learn more about Lido, read more directly from the Lido Official Site.

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Hi! I'm

Ricky Young

My belief is that financial freedom cannot be obtained by just a 9-to-5, but a combination of smart investing and passive income. This is my journey to achieve financial freedom.

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