Since its launch in 2015, Ethereum’s programmable structure opened the gateway for decentralized finance (DeFi) and the rise of DApps, DEXs, NFTs, liquidity pools, yield farming, and much more.
Nonetheless, nothing in life is perfect, neither is Ethereum. With the huge adoption of the blockchain as the main stage for transactions and the growing popularity of DeFi, two main issues started plaguing Ethereum’s network: slow processing and high fees.
There were cases in which investors needed to wait even two hours to process a simple transaction, due to congestion of the network. High gas and transaction fees also preclude many people from adopting the network, with fees going as high as US$30 sometimes.
Scaling to Win
In this sense, Ethereum scaling has been one of the most heated debates since the time of its launch. This debate intensifies in periods of major network congestion, such as the 2017 crypto bull market or more recently, in 2020.
This year the situation got even worse, due to the rising popularity of DeFi and the frenzy surrounding yield farming. As a consequence, there were periods when spikes in gas fees were so constant that investors almost went mad.
But how scaling would help to solve this situation? A major scaling on the Ethereum blockchain could happen by two possibilities: scaling the base layer itself (layer 1) or scaling the network by offloading some of the work to another layer (layer 2).
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In the case of Ethereum, given the high volume of processes within the blockchain, the second option would be the ideal. Hence, a second layer would be built on top of layer 1, which would not require any direct changes on it due to the nature of programmable smart contracts.
Currently, it is known that Ethereum processes around 15 transactions per second on its layer 1. A layer 2 scaling would increase this number dramatically, with the new layer processing 2000-4000 transactions per second.
Nonetheless, any major changes require time and all we have now are signs that point out this “metamorphosis” happening in a near future.
Ethereum 2.0 Is Coming
In this sense, many people may question: “But was not Ethereum 2.0 supposed to scale the network and solve these issues?”
Ethereum 2.0 represents the first step to the major scaling of the Ethereum blockchain- but it is still the first of many steps. This innovation introduces PoS (Proof-of-Staking) and Sharding into the Ethereum network.
These two resources will increase the transaction throughput on the base layer, which will drastically increase the speed and efficiency experienced by users.
ETH 2.0 Additional Issues
ETH 2.0 represents a transition stage, so users must be prepared to react properly. At first, early stakes will lock their ETH until transactions are enabled on ETH 2.0, which is still an undefined period (6 months, 1 year, or more).
All the staked ETH will be virtually illiquid, given that ETH cannot be moved, traded, or used as collateral when a user is staking it on ETH 2.0. Also, users can only stake multiples of 32 ETH.
For instance, users that own 5 ETH and want to participate in staking will not be able to do so alone. On the other hand, anyone who owns 45 ETH will only be able to stake 32 ETH from their holding.
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As the first contracts deployed will be the deposit contracts, state transitions such as transfer will not be launched until the later phases of the ETH 2.0 transition. Hence, all ETH staked on ETH 2.0 can be considered virtually unmovable for an uncertain period.
But how users can participate in ETH 2.0 without sacrificing the ability to use, sell, trade, or do anything else with their precious ETH? That is where lies the proposal of value brought by Lido.
What Is Lido?
Lido is an innovative project that is still under the building process. Its purpose is to act as a staking solution for ETH 2.0, built to solve all additional issues brought by the transition stage.
The project’s solution is backed by several industry-leading staking providers, enabling the much-needed liquidity for the ETH staked on ETH 2.0 and allowing participation with any amount of ETH.
Users can use Lido to stake ETH on the Ethereum beacon chain, receiving bETH in exchange. The bETH token will represent the ETH staked on ETH 2.0 on a 1:1 basis.
For those unaware, ETH’s beacon chain is a new blockchain at the core of ETH 2.0 that will ensure the synchronization of the network as a whole. Hence, Lido proposes to act as a bridge bringing ETH 2.0’s staking rewards to ETH 1.0.
Dig Into It
The user’s ETH balance on the beacon chain will increase as the staked ETH starts generating rewards from ETH 2.0. Hence, bETH balances will update equivalently once per day, allowing stakers to access on ETH 1.0 the value of the staking rewards received on ETH 2.0.
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bETH is not meant to serve only as a representation token, instead of being usable in the same way anyone can use ETH tokens. Investors can use to buy, sell, trade, bet, and even use it as collateral for on-chain lending, given that it is compatible with DeFi applications.
Once transactions are fully enabled on ETH 2.0, bETH holders can also redeem their tokens for ETH.
Lido is a yet-to-launch staking solution for ETH 2.0 built to facilitate the transition into the new facet of the Ethereum network.
Given that the first contracts deployed for ETH 2.0 will be deposit contracts, state transitions such as transfers will not be launched until the later phases of the ETH 2.0 transition. This way, all ETH staked on ETH 2.0 will be considered virtually unmovable and illiquid for an undetermined period.
Lido aims to permit users to stake ETH on the Ethereum beacon chain, receiving bETH tokens in exchange. These tokens will represent the ETH staked on ETH 2.0 on a 1:1 basis.
The value brought by the platform proposes to remove the adversarial incentives of ETH 2.0 and allow users to stake their ETH without sacrificing the possibility to use, sell, trade, or do whatever with their funds.