Investing in Lido

Daren MatsuokaPorter Smith

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.


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