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On Thursday, Lido, the top liquid staking system on Ethereum, announced support for a wrapped version of its staked ether (stETH) token on Ethereum layer 2 networks Arbitrum and Optimism.
Lido is now on L2 🏝️
Bridge your staked ETH to Layer 2 protocols at the click of a button to benefit from lower gas fees and exciting DeFi opportunities.
— Lido (@LidoFinance) October 6, 2022
Each stETH token symbolises one ether (ETH) token staked on Ethereum’s network, thus helping to protect the network in exchange for incentives. stETH, which has a market capitalisation close to $5 billion and trades around the price of ETH, has become a popular item in Ethereum’s burgeoning decentralised finance (DeFi) industry.
Arbitrum and Optimism enable users to transact in the Ethereum ecosystem without worrying about traditionally high fees and slow networks. These so-called optimistic rollups execute transactions on networks distinct from Ethereum’s congested main chain, package them, and send them back to Ethereum, where they are added to its ledger.
DefiLlama stated that over $3 billion of bitcoin had flowed on the Arbirtrum and Optimism networks at press time. Now, users of these quicker and cheaper Ethereum sister networks can access wrapped staked ETH (wstETH), a variant of stETH “wrapped” and bridged across from Ethereum.
What is staked ether?
Ethereum, the second-largest blockchain network behind Bitcoin, migrated to a new proof-of-stake system with a significant update called “the Merge” last month. The new system replaced cryptocurrency mining with staking, in which users stake ether (ETH), the native coin of Ethereum.
Today, staking ether entails sending it to an Ethereum network address where it earns rewards but cannot be withdrawn. Staked ether (stETH) will remain non-withdrawable until a network update estimated to occur within the following year.
Users who seek to engage in staking without sacrificing liquidity have turned to liquid staking solutions such as Lido, which stake their ETH and return a stETH token. On the open market,stETH tends to move around the price of ETH; it will ultimately be exchangeable 1:1 for ETH once the network permits the withdrawal of stakes.
Coinbase and Kraken have imitated Lido’s strategy, although their staked ETH offers are far less popular.
The asset is frequently used by borrowers, lenders, and traders who regard it as a handy method to stake Ethereum (and earn interest) without sacrificing the ability to purchase and sell their tokens.
Currently, Lido distributes user deposits across many validator partners and controls around 29% of all staked ETH. Staked ETH indicates Ethereum’s security infrastructure, so the significant concentration of stake with Lido has given rise to centralisation concerns.
Moreover, wrapping tokens presents hazards. In the past, bridge systems such as the one used to move stETH from Ethereum to Arbitrum and Optimism have been the target of significant attacks, including a recent $190 million exploit on the Nomad token bridge.