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Let’s investigate the top 5 DeFi platforms

We’re going to take a look at the top 5 DeFi projects by Total Value Locked (TVL). We’ll cover what each project is, what it does, how it got so popular and, of course, investigate its pitfalls, too.

Harry Hamburg
Harry Hamburg
15 min read

For this month’s premium issue, we’re going to do something a little different.

We’re going to take a look at the top 5 DeFi projects by Total Value Locked (TVL).

We’ll cover what each project is, what it does, how it got so popular and, of course, investigate its pitfalls, too.

You can see the top 5 list below:

A screenshot of a phone

Description automatically generated with low confidence
Source: DeFi Llama

As usual, none of this should be taken as investment advice. I’m not saying whether you should or shouldn’t use any of these projects.

However, as you know, DeFi is one the most important areas in crypto, so it’s useful to know who the major players are and what they do. This could well be “the future of finance” after all.

Now, if you’re not so au fait with DeFi, I’d first suggest reading two of my previous pieces as primers:

That should give you all the pre-knowledge and ridiculous jargon you need before we begin.

So now you’ve read them (you did read them, right?) let’s get going….

#1 Lido

Name:

Lido.

Size (TVL):

$12.5 billion.

Does it have its own token?

Yes. Lido’s LDO token is used for governance. It’s currently the 39th largest crypto by market cap.

Meanwhile Lido’s staked Ether token (stETH) is currently the 8th largest crypto by market cap.

Networks it runs on:

Ethereum, Solana, Polygon, Polkadot, Kusama.

What it does:

Lido is a liquid staking protocol that got super popular before “the merge”.

It overcomes two hurdles to staking Ethereum the traditional way:

1. To stake Ethereum the traditional way, you need at least 32 ETH, a very reliable internet connection and very good computer hardware.

Lido lets people stake any amount of ETH they like, and it takes care of the internet connection and computer hardware part.

2. Before the latest Ethereum upgrade, you couldn’t unstake your ETH once it was staked. And even since then, you can’t use your staked ETH to do anything while it’s staked.

Lido introduced “liquid staking” which means your stake is liquid – as in, you can use it for other things while it’s staked.

People deposit ETH into a smart contract and get stETH (as in staked ETH) in return.

stETH is like a placeholder. It represents real ETH and keeps track of the amount of staking rewards the original ETH deposit has accrued.

The major advantage of this is that stETH can be used like any other token. So people can use it as collateral in other DeFi platforms.

Then when people want their ETH back, they use Lido to burn their stETH and redeem their ETH, plus their accumulated ETH rewards.

Why is it so popular?

Originally it was popular because it was a way to stake your Ethereum without having to lock it up for an unknown amount of time.

You could stake your ETH with Lido, get your stETH and use it in DeFi.

Then, whenever you felt like it you could trade your stETH for real ETH.

You’d get back your original ETH plus your staking rewards.

Remember, stETH is constantly accruing staking rewards, so it’s constantly increasing in value.

It’s remained popular because it remains to have a major advantage over centralised staking options like Coinbase or Kraken.

That is, it’s decentralised. Staking is controlled by a smart contract, not by a centralised exchange, which could go bankrupt (as they tend to do) or get shut down by regulators (as they also tend to do).

Plus, degens can YOLO their stETH into DeFi while it continues to accrue staking rewards.

Lido originally started on Ethereum, but it’s since branched out to other networks, as noted above.

What kind of returns are people getting?

Lido takes a 10% cut from users’ ETH staking rewards.

So, the return is whatever the current ETH staking rewards are, minus 10%.

This compares very well to the 25% ETH staking fees Coinbase takes and the 15% ETH staking fees Kraken takes.

(I use Coinbase and Kraken for fee comparison as they are, by far, the two most trusted centralised exchanges in the world right now.)

What are the caveats?

The main caveat of Lido is tax. When a user deposits ETH and gets stETH in return, that counts as disposal of an asset and so the user will then be liable for capital gains tax.

I’ve seen many people argue it isn’t actually disposal of an asset and so it shouldn’t be a taxable event. But, in the UK at least, that’s just wishful thinking.

Of course, if someone isn’t in profit when they decide to stake with Lido, this doesn’t really matter. Although, redeeming that stETH for ETH down the road will also count as a taxable event, too.

If you want to know more about the tax implications of stETH and other “rebase tokens”, koinly has a good guide here.

The second caveat is also one of Lido’s biggest strengths – its decentralised nature.

The advantage of it being decentralised is it should – in theory – be much safer than staking with a centralised exchange like Coinbase or Kraken.

For more on why decentralised exchanges should be far safer than centralised ones, see my article: in defence of DeFi.

However, with Lido being decentralised, that means you’re putting all your faith in a smart contract that you probably don’t have the technical know-how to evaluate for yourself.

Given that Lido has been going for a good few years now, though. And given that it has undergone many, many code audits, it’s probably safe to assume its smart contracts are safe. Probably.

The next caveat is that Lido is controlled by the Lido DAO.

In some ways this is good because everyone who holds Lido DAO tokens (LDO) gets a vote.

But, if we look at the Lido DAO initial token distribution (which wasn’t the easiest thing to find) we can see it was as follows:

  • DAO treasury: 36.32%.
  • Investors: 22.18% (VCs, not the public).
  • Validators and signature holders: 6.5%.
  • Initial Lido developers: 20%.
  • Founders and future employees: 15%.

And Lido also points out that:

Upon the launch of the Lido DAO, 1 billion LDO tokens were minted.
At time of writing, founding members of the Lido DAO possess 64% of LDO tokens. These are locked for 1 year, after which they will be vested over 1 year. At the time of writing, the only unlocked LDO in existence are 0.4% airdrop distributed to early stakers and DAO treasury tokens. Anyone can make a proposal on how they can be used via research.lido.fi.

But that time of writing was January 2021, which means all those tokens are now fully unlocked.

So, as usual, this DAO is actually 71.32% controlled by Lido insiders and 22.18% controlled by VCs.

The people who were using the network – validators and signature holders – only control 6.5% of the DAO.

So, once again, as with most decentralised governance, it’s not really decentralised at all.

(I covered this issue extensively here: Arbitrum and the sham of “decentralised” governance, so I won’t bore you by going over it again.)

What this means in practice is even though Lido is a decentralised platform, what happens to it is up to a small circle of insiders.


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