TL;DR
- Lido Finance is a liquid staking solution popular on the Ethereum network
- Lido recently surpassed 32% of the total Ether market share
- We outline of the risks related to liquid staking through a custodial liquid staking platform
- Meta Pool liquid staking solution has key differences from Lido that insulates us from the challenges they have been facing
Web3: the Case for Decentralization
One of the promises of Web3 is decentralization: meaning that instead of allowing an entity to be the nexus of all transactions in their domain (e.g. Google search, Facebook, Apple) and therefore be the sole unique decision maker, a web3 network leverages the community and distributes this decision power to multiple entities.
In the case of a Proof-of-Stake Layer 1, the process of validating and enabling transactions is delegated to multiple entities called validator nodes. This is to avoid centralization and improve the censorship-resistance of the Layer 1 network.
Liquid Staking protocols have a key role to play in supporting this decentralization of Layer 1 networks because of their capacity to distribute the L1 native token to multiple validators for staking purposes.
However not all liquid staking protocols work the same. And not all liquid staking derivatives (LSDs) are built the same way. This article is going to compare Meta Pool and its token, stNEAR, to Lido Finance and their token stETH.
Why Analyze the Differences between Lido and Meta Pool?
In short, there are key differences between the underlying technology of the two platforms. As many familiar with liquid staking may know, there was much concern circulating in June about stETH depegging from Ethereum. Very reasonably, Meta Pool users asked the same question about the potential risk of stNEAR depegging.
Additionally, serious stability and security concerns within the Ethereum community appeared recently, many of which relate to the seeming centralization occurring on Lido. Because of our surface level commonalities, we do believe it is important to address the issues raised regarding Lido’s liquid staking solution for Ethereum.
Lido Liquid Staking on Ethereum
Overview
Lido is a liquid staking solution for multiple L1 protocols: Ethereum, Solana, Kusama, Polygon, and Polkadot. However Lido’s main operations and source of revenue are on Ethereum which accounts for 98.2% of Lido’s TVL in USD. Solana comes second, representing only 1.5% of Lido’s TVL in USD.
To liquid stake Ethereum through Lido, a user can deposit their $ETH to receive stETH. The first significant departure from Meta Pool’s model is that Lido will lock that $ETH onto the Ethereum 2.0 smart contract. This has major implications, as those $ETH will remain locked until the official ‘merge,’ when Ethereum switches from proof-of-work to proof-of-stake. The merge has been ongoing for the previous 7 years, and an official release date still has yet to be determined.
Lido’s Problem(s) With stETH
While stETH can be traded through a number of other DEXs, the stETH supply increases steadily as people continue to stake $ETH through Lido. This is compounded by the fact that Lido pays their staking rewards in stETH, which increases the quantity they have to mint.
Additionally, Lido’s stETH is a rebase token. What this means is that Lido can burn or mint stETH to ensure it remains pegged to the current price of $ETH. To maintain their peg, Lido needs to control the supply of stETH relative to $ETH.
However, as they are paying staking rewards in stETH, and cannot control the amount of $ETH staked with Lido (and thus locked on the $ETH 2.0 smart contract), there is still potential for market pressure to cause a dramatic imbalance between the two.
In June, whales holding stETH began dumping their token supply back into the market amid security and centralization concerns. As such, the supply increased dramatically while demand was reduced due to the current bear market conditions. The result was a depeg of stETH to $ETH.
More concerns arise considering the fact that the $ETH tokens locked on the Ethereum 2.0 smart contract will have a 6-12 month lock up period even after the merge. If unstakes are slow and capital remains frozen, selling pressure could increase even more, increasing the risk of a further depeg.
As the depeg affects stakers, degens who are using stETH in a farming loop are forced to add either more collateral, or deleverage their position at the risk of being liquidated. This in turn creates more selling pressure for stETH holders.
The Ethereum Centralization Risk
Another concern beyond the tokenomics underlying stETH, is that Lido has recently surpassed 32% of the market share of the $ETH token which raises serious concerns about stability and security inherent to centralization.
Lido has countered these concerns by highlighting the fact that another actor, with less democratized control like Coinbase or Kraken could easily overtake a similar market share of $ETH and perpetuate these same issues.
While this perspective does show that Ethereum’s switch from PoW to PoS will still be fraught, it is not a clear defense of Lido’s model. Many professionals are concerned about the risk of monopolization, whereby protocols such as Lido gain such a share of the market that they are able to increase their liquidity and utility to the point of rendering other platforms obsolete.
The risk is that holders of $LDO could (and would likely be financially incentivized to) cause nodes to communicate with one another, potentially interrupting the production of new blocks.
“In the extreme, if a(n) Liquid Staking Derivative (LSD) protocol exceeds critical consensus thresholds such as 1/3, 1/2, and 2/3, the staking derivative can achieve outsized profits compared to non-pooled capital due to coordinated MEV extraction, block-timing manipulation, and/or censorship – the cartelization of block space”
Vitalik Buterin voiced similar concerns in a recent blog post entitled “The Risks of LSD.” In the article, he outlined how cartelization is nearly certain if capital becomes to centralized on liquid staking platforms.
Node operators are either decided through governance tokens or automated through reputation and profitability. Vitalik argues that either mechanism can cause cartelization if the accumulation of capital crosses the 50% threshold. Governance can become insidious, and raises the possibility of deliberate censorship.
Key differences in Meta Pool’s Staking Process
While outlining the above issues with Lido’s model of Ethereum consolidation, it’s important to explain why our team does not have the same concerns for stNEAR as the market does for stETH. Namely, the differences come from our model for stNEAR, and our smart contract on NEAR protocol.
First and most importantly is that Meta Pool is a non-custodial smart contract built on NEAR. We are not waiting for a merge, as NEAR is already a PoS protocol. As such, we do not lock your tokens for an indeterminate period, and liquid unstakes can happen instantly given that there is enough liquidity in our pool.
Secondly, users receive NEAR as rewards instead of stNEAR. By receiving the L1 tokens as a reward, Meta Pool avoids the issue of constant minting for rewards.
Users can unstake their NEAR tokens anytime they want either through the standard network delayed-unstake process or through the immediate unstake feature available on Meta Pool.
Additionally stNEAR can be swapped for NEAR at any point on Ref.finance or Trisolaris.
Lastly, stNEAR is not a rebase token like the stETH issued by Lido. NEAR tokens entering the Meta Pool are sent to the NEAR Protocol network validators nodes. The price of the stNEAR token increases every epoch, and is measurable in the NEAR network from the established APR – only the USD price of NEAR itself affects the price of stNEAR.
In sum, the value of stNEAR grows due to the APR of the network itself and is directly dependent on the movement of the price of NEAR.
The vision behind Meta Pool is to create a way for individuals to be self sovereign and create on-chain value for a blockchain protocol in addition to help NEAR Protocol become more decentralized and censorship resistant for the long run. The core tenants are what drove our development, and are subsequently reflected in the product we have created.
What Does All This Mean?
The discussion of differences between liquid staking protocols can be quite technical and difficult to follow. However, in short, Lido has a centralization problem that is inherent in the structure of stETH and is becoming more obvious as capital continues to accumulate.
Meta Pool is committed to maintaining a decentralized platform for liquid stakers that provides true stability and security to all users. We are insulated from the current issues affecting Lido because we are built on a protocol that has already adopted the cutting edge of blockchain technology. Rather than betting on a large-scale protocol shift, we have built our platform on solid ground to give you a dependable and decentralized product.
Many DeFi platforms may still seem like a casino, where users hope to hit big through blind investment in eye-catching APYs. Meta Pool is built on the philosophy that we create a product that works for the user, and doesn’t add risk beyond believing in the technology of our L1.
We will be releasing some important information next week regarding the $META token and its increased utility for governance, allowing our users to have control over a small percentage of node operators and a portion of total delegated funds. This move is in line with our goal of offering a truly decentralized platform that is controlled by, and works for you – the user.
Keep on staking!
About Meta Pool & stNEAR
Meta Pool is the leading liquid staking solution for $NEAR and wNEAR token holders. With Meta Pool you earn NEAR staking rewards and maintain your liquidity to participate in DeFi protocols on NEAR and Aurora.
Users staking $NEAR and wNEAR with Meta Pool receive in exchange stNEAR (staked NEAR) tokens.
stNEAR simultaneously accrues staking rewards and unlocks users’ liquidity enabling them to participate in DeFi activities (e.g. lending, farming, borrowing) on NEAR and Aurora.
Stake $NEAR on Meta Pool
~11% APY
Get stNEAR
Yield-bearing token
Go DeFi on NEAR & Aurora
More APY and more rewards
Meta Pool also solves the problems associated with Proof-of-Stake networks staking: illiquidity, immovability and accessibility. Meta Pool also aims to distribute staking in multiple validators to improve censorship-resistance of the NEAR network.
With a TVL of ~9 Million $NEAR and growing, Meta Pool has become in just a few months a cornerstone element of the NEAR ecosystem. Meta Pool is making NEAR Protocol more decentralized and therefore more secure.
In February 2022 Meta Pool has been successfully audited by BlockSec, confirming the implementation of the highest security standards.
For more information visit https://metapool.app.
