Investing in Lido

Ethereum’s upcoming transition from Proof of Work (PoW) to Proof of Stake (PoS) has the potential for cascading effects across the crypto landscape.

Instead of using computational resources to secure the network, anyone will be able to stake their ETH and operate block-producing validators, drastically reducing energy consumption. Ethereum’s transaction fees and inflationary-driven rewards will be distributed to more participants in the network, broadening access to economic opportunities within Ethereum’s ecosystem.

Nonetheless, staking ETH has significant barriers today. Perhaps most notably, there is a 32-ETH minimum required to operate a node. This alone prevents a significant number of network users from running their own validator, and there is no native method for delegating one’s stake to circumvent these minimum capital requirements. Moreover, staking to the Beacon chain today is a one-way transaction – effectively locking up ETH until the transition from PoW to PoS – resulting in a high opportunity cost of capital given the abundance of yield-generating alternatives that exist in DeFi.

Because of these challenges, centralized exchanges have been best-positioned to offer staking services due to efficiencies of scale. Companies like Binance, Kraken, and Coinbase can easily pool their users’ assets (eliminating the minimum capital requirements), stake it on their behalf (eliminating the operational burden), and issue a liquid market for this staked asset (unlocking liquidity and allowing users to swap back from staked ETH to ETH). These services are valuable for their users, creating a big opportunity for a decentralized alternative.

That’s why we’re excited to invest in Lido, an effective, decentralized staking platform. It offers one of the easiest ways to stake ETH and other PoS assets today, while striving for decentralization through the DAO’s governance. Lido democratizes staking.

The Lido community’s unwavering commitment to decentralization really stood out to us. They recognize that for their approach to succeed, they will need to create a fully-trustless staking pool while also embracing alternative solutions. 

Finally, Lido solves the competitive incentives between staking and seeking yield in DeFi. By issuing an Ethereum-native liquid token, Lido allows you to use staked ETH as collateral within DeFi in the same way you can use ETH currently.

We actively contribute to the networks and communities in our portfolio, so in addition to our investment in Lido, we staked a portion of a16z Crypto’s ETH holdings on the Beacon chain. Staking with Lido removes many of the logistical complexities that institutional investors have faced.

We look forward to supporting the Lido community on its long journey ahead. There will be competitive incentives even after the PoS transition between securing the Ethereum network by staking and alternatively seeking higher returns from participating in DeFi. We will contribute, as both a staker and governance participant, to help ensure a fair, transparent, and credible staking ecosystem.

We want a world where a diverse set of centralized staking services, decentralized staking pools, and individual validators all play a role in securing Ethereum. We are excited to be working with Lido as we collectively build towards this future.

***

The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; a16z has not reviewed such advertisements and does not endorse any advertising content contained therein.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments for which the issuer has not provided permission for a16z to disclose publicly as well as unannounced investments in publicly traded digital assets) is available at https://a16z.com/investments/.