Understanding Ethereum 2.0, Proof-of-Stake, and Lido’s Rise to $5.9B TVL

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The transition to Ethereum 2.0, the shift from Proof-of-Work (PoW) to Proof-of-Stake (PoS), and the explosive growth of Lido—now boasting over $5.9 billion in Total Value Locked (TVL)—have reshaped the decentralized finance (DeFi) landscape. In fact, Lido has surpassed MakerDAO as the DeFi protocol with the highest TVL, marking a pivotal moment in Ethereum's evolution.

But what exactly is Ethereum 2.0? Why are staking-as-a-service platforms like Lido gaining such momentum? And how does staking work in this new era? Let’s break it down.

Ethereum 2.0: More Than Just a Consensus Change

Ethereum 2.0, also known as Serenity, represents a multi-phase upgrade designed to make Ethereum more scalable, secure, and sustainable. The most significant change is the shift from energy-intensive PoW mining to energy-efficient PoS validation.

This transformation didn’t happen overnight—it was executed in key phases:

  1. December 1, 2020: The Beacon Chain launched, introducing the PoS mechanism alongside the existing PoW mainnet.
  2. September 15, 2022: The Merge occurred, fully integrating the Beacon Chain with Ethereum’s mainnet and officially ending PoW.
  3. Expected March 2023: The Shanghai Upgrade—the first major post-Merge upgrade—enables withdrawals of staked ETH and rewards.

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It’s important to clarify a common misconception: The Merge did not improve network performance. Gas fees and transaction throughput (TPS) remained largely unchanged. Scalability improvements will come later through sharding (e.g., EIP-4844), which aims to reduce congestion and lower costs. Thus, Ethereum 2.0 is a long-term vision—not just a single event.

How Staking Works in Ethereum’s PoS Era

In Ethereum’s PoS model, validators secure the network by locking up ETH as collateral. As of now:

If you want to become a solo validator, you must:

Failure to do so results in slashing penalties—loss of staked funds due to downtime or malicious behavior.

Additionally, until the Shanghai upgrade, staked ETH and earned rewards were locked and non-withdrawable—a major barrier for many users.

Staking Models: From Solo Validators to Liquid Staking

Given the high barriers of solo staking, several alternative models have emerged:

1. Staking-as-a-Service (staaS)

Users provide the 32 ETH but outsource node operations to third-party providers. While this reduces technical burden, users still face:

Health indicators for staaS providers include open-source code, audits, bug bounties, decentralization level, and operational track record.

2. Pooled (or Joint) Staking

This model allows users to combine funds to meet the 32 ETH threshold. It dramatically lowers entry barriers and introduces liquidity tokens—a game-changer.

For example, when you stake ETH through Lido, you receive stETH at a 1:1 ratio. This token represents your staked ETH plus accrued rewards—and it’s liquid.

You can:

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3. Centralized Exchange Staking

Exchanges like Coinbase, Kraken, and Binance offer staking services using customer funds. While convenient, these are custodial solutions and operate outside native DeFi smart contracts.

Lido: The Leader in Liquid Staking

Lido dominates the liquid staking space with:

So how does Lido profit? It captures the spread between the network’s ~4.8% yield and the ~4.4% passed to users—earning roughly 0.4% in fees. With billions in TVL, this margin translates into substantial revenue.

But Lido isn’t just a yield aggregator—it’s a sophisticated intermediary:

This structure creates a moat: trustless operation combined with broad accessibility.

What Is stETH? And Why Is It Slightly De-Pegged?

stETH is a liquid staking derivative—a token that represents staked ETH plus future rewards. Though designed to be pegged 1:1 to ETH, its market price often trades slightly below parity.

Why?

Despite temporary de-pegging, stETH remains tightly anchored in value because redemption will eventually be possible. In fact, arbitrage mechanisms help keep the peg stable over time.

Will Withdrawals Cause a Market Crash?

Many wonder: What happens when 15+ million staked ETH become withdrawable? Could this trigger a sell-off?

While valid concerns exist, several factors mitigate risk:

  1. Withdrawal Rate Limits: Only about 1,350 validators (~43,000 ETH) can exit per day—ensuring a gradual release.
  2. Economic Incentives: If many validators withdraw, staking yields will rise to attract new participants—naturally balancing supply and demand.
  3. Long-Term Holders: Much of the staked ETH belongs to investors with strong conviction in Ethereum’s future.

Thus, while short-term volatility is possible, a catastrophic dump is unlikely.

Is Lido Too Centralized?

With Lido controlling 30% of all staked ETH, some question its centralization risk.

Important clarification:

However, Lido does control which node operators join its network—a legitimate governance concern. To address this, Lido uses a decentralized autonomous organization (DAO) model where token holders vote on operator selection and protocol upgrades.

Still, ongoing efforts are needed to ensure true decentralization across infrastructure layers.

Frequently Asked Questions (FAQ)

Q: What is Ethereum 2.0?

A: Ethereum 2.0 refers to a series of upgrades transitioning Ethereum from PoW to PoS, improving scalability and sustainability through phases like the Beacon Chain, Merge, and future sharding.

Q: Can I stake less than 32 ETH?

A: Yes—through liquid staking platforms like Lido, Rocket Pool, or Ankr, you can stake any amount and receive a derivative token (e.g., stETH).

Q: What is TVL and why does it matter?

A: Total Value Locked measures the amount of assets deposited in a DeFi protocol. High TVL indicates user trust and strong adoption—key metrics for evaluating protocol health.

Q: Is stETH safe?

A: stETH is backed 1:1 by real staked ETH and operates under audited smart contracts. While minor de-pegging can occur pre-withdrawals, systemic risk remains low.

Q: When can I withdraw staked ETH?

A: Withdrawals became possible after the Shanghai upgrade in April 2023. Partial withdrawals (rewards) and full exits (principal) are now supported.

Q: How does Lido make money?

A: Lido charges a small fee (currently ~10% of staking rewards) from validators. With massive scale, even small margins generate significant revenue.

Final Thoughts

Ethereum’s transition to PoS marks a turning point in blockchain history. While performance gains await future upgrades like sharding, the foundation has been laid for a more efficient and eco-friendly network.

Meanwhile, protocols like Lido are bridging accessibility gaps by offering liquid staking, turning illiquid assets into productive capital within DeFi. With over $5.9B TVL and growing influence, Lido exemplifies how innovation thrives at the intersection of infrastructure and user experience.

As Ethereum evolves, so too will the tools that empower everyday users to participate—securely, efficiently, and profitably.

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