Lido, the leading liquid staking system on Ethereum, said Thursday it will support a wrapped version of its popular staked ether (stETH) token to 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 represents an ether (ETH) token staked with Ethereum’s network, meaning it helps to secure the network in exchange for rewards. stETH, which has a market cap near $5 billion, trades around the price of ETH and has become an extremely popular asset in Ethereum’s budding decentralized finance (DeFi) scene.
Read more: Crypto Staking 101: What Is Staking?
Arbitrum and Optimism allow users to transact in the Ethereum ecosystem without falling prey to the network’s historically high fees and slow speeds. These so-called optimistic rollups process transactions on networks separate from Ethereum’s congested main chain, bundle those transactions up and pass them back to Ethereum where they are added to its ledger.
Over $3 billion worth of cryptocurrency was circulating on Arbirtrum and Optimism’s networks at press time according to DefiLlama. Now, users of these faster and cheaper Ethereum sister networks will have access to wrapped staked ETH (wstETH), a “wrapped” version of stETH that has been bridged over from Ethereum.
What is staked ether?
Ethereum, the largest blockchain network behind Bitcoin, moved last month to a new “proof-of-stake” system with a major upgrade dubbed “the Merge.” The new system ditched cryptocurrency mining in favor of staking, where users lock up ether (ETH), Ethereum's native token.
Today, staking ether means sending it to an address on the Ethereum network where it accrues rewards but cannot be withdrawn. Staked ether (stETH) will remain impossible to withdraw until a network upgrade – expected sometime next year.
Users wishing to participate in staking without losing liquidity have turned to liquid staking solutions like Lido, which take their ETH, stake it, and give them a stETH token in return. This token tends to trade around the price of ETH on the open market; it will eventually be exchangeable 1:1 for ETH once the network allows stakes to be withdrawn.
Exchanges such as Coinbase and Kraken have replicated the Lido playbook but their staked ETH offerings are nowhere near as popular.
Nearly $1 billion stETH sits in liquidity pools on the major decentralized exchange platform Curve, and the asset is used widely by borrowers, lenders and traders who view it as a convenient way to easily stake Ethereum (and earn interest for doing so) without losing the ability to buy and sell their tokens.
Currently, Lido – which spreads user deposits between several different validator partners – holds around 29% of all staked ETH. Staked ETH represents control of Ethereum’s security apparatus, so the high concentration of stake with Lido has led to concerns around centralization.
Wrapping tokens, moreover, comes with risks. Bridge systems like the one being used to transfer stETH from Ethereum to Arbitrum and Optimism have, in the past, been the victim of major exploits, including a recent $190 million attack on the Nomad token bridge.