It was less than a year ago that the U.S. was awash in crypto ads that promised consumers they could make easy returns of 7% or more. We all know how that ended. The companies behind those ads are now bankrupt or facing indictment and many of their customers are wondering if they'll see their money again.
All of this makes me wary about writing about any crypto service offering returns higher than a bank CD rate but, in the case of Lido, it's intriguing enough to take a look. If you're unfamiliar, Lido is in the staking business—a very different operation than Celsius and other conspicuous advertisers from 2022, whose business model was based around casino-style lending.
Staking is not based on lending at all but instead entails getting paid for operating proof-of-stake blockchains like Ethereum. In order to do this, and verify transactions, you have to be a validator—an operator with special software who, in the case of Ethereum, must also lock up 32 Ether tokens as part of a system to ensure honesty. But most people don't have 32 Ether—currently worth around $50,000—which is where Lido comes in.
Lido is one of a number of "staking as a service" operations that runs validator nodes and, in return for a 10% cut, lets anyone lock up a small amount of crypto in order to share in the proof-of-stake rewards. The current return for those staking Ethereum on Lido is just over 5%. And while staked Ethereum can't be withdrawn until an expected upgrade to the blockchain goes into effect this spring, Lido users receive tokens called stETH that are worth roughly the same as Ethereum and can be traded or sold anytime.
All of this might sound like too much bother for ordinary investors but, for many, Lido is about more than a 5% return. According to Jacob Blish, head of business development at Lido, the service was built by developers who feared the growth of proof-of-stake blockchains would produce excessive centralization as large entities like Coinbase and Andreessen Horowitz took over the validation process.
So far the project is working. While Coinbase does indeed control a significant number of validators on the Ethereum network, Lido—which is based around a decentralized protocol—runs even more. Lido also got a boost this month after the Securities and Exchange Commission went after the exchange Kraken's staking-as-a-service offering. In the view of many in the crypto world, Lido is beyond the reach of the SEC because its core is a decentralized piece of software that no one totally controls.
But when I chatted with Lido's Blish, he offered a more cautious assessment. Blish noted that while Lido has many decentralized elements—including a DAO that handles corporate governance issues—it is not totally beyond the reach of regulators. He says that, when push comes to shove, agencies like the SEC could go after anyone—including him—who is tied to the DAO. This wouldn't shut Lido down since its underlying protocol would keep operating but it would make it much harder to use.
For now, though, Lido doesn't appear to face any immediate regulatory threats. And in the longer term, it will likely flourish because, unlike the crypto companies advertising flashy returns a year ago, Lido is based on much more than high-risk lending.
Jeff John Roberts
jeff.roberts@fortune.com
@jeffjohnroberts
