- Lido wants to attract more institutional users.
- Ensuring deep liquidity is a major focus.
- The protocol is also hints at new features to attract institutional clients.
Restaking, one of the buzziest ideas in DeFi this year, has swelled to a $15 billion market.
It’s huge with so-called DeFi degens, risk tolerant crypto investors who hungrily seek out the highest yields on their assets. In recent months, several DeFi protocols have pivoted to restaking to cash in on the trend.
But Lido, the biggest DeFi protocol with $25 billion of deposits, was strangely absent from the party.
“It’s not a priority,” Kean Gilbert, Lido’s institutional relations lead, told DL News.
Instead, Lido will focus on catering to institutional investors over DeFi degens by further expanding its flagship product called stETH — a tradable version of staked Ether.
“Institutions aren’t bullish on restaking because it’s not mature yet,” said Gilbert.
Institutional investors refer to small hedge funds, family offices, venture capitalist firms, investment funds and trading firms.
Restaking is a way to repurpose staked tokens — like Ether — to secure other networks and earn their owners additional rewards.
But development is slow. Despite staking protocols like EigenLayer promising users increased yields, the protocol still hasn’t implemented this feature.
Expanding stETH
Lido is the biggest so-called liquid staking protocol. It lets investors stake Ether for a 3% annual yield while receiving stETH, a tradable version of their staked Ether they can use in DeFi.
The stETH token already accounts for a whopping 70% of the Ether liquid staking market.
But Lido wants more, and institutional investors are a relatively untapped group of users.
“The priority is to double down on stETH and liquid staking, and add as much depth as possible,” Gilbert said.
Liquidity is a top priority. Funds and family offices need to know there’s enough stETH sloshing around to let them exit their positions at a moment’s notice, should the need arise.
“They want to know how much they can sell, and how long it takes to sell,” Gilbert said.
Analysts have previously pointed to stETH’s declining liquidity as a potential issue. Currently, there’s only $198 million of stETH liquidity across decentralised exchanges, a 30% drop since the start of the year.
The fear is that if many stETH holders suddenly need to sell their tokens there won’t be enough liquidity for them to do so. This could cause the asset to break its peg from Ether and set off a cascade of liquidations.
The likelihood of such a situation impacting institutions is limited, Gilbert said. Why? Because many of the funds that use stETH do over-the-counter transactions, selling directly to each other bypassing the open market.
“If people felt there wasn’t enough depth there, they definitely wouldn’t use it,” Gilbert said.
Segregated pools
Liquidity is one thing. There are other things institutions have to consider, too.
Some are cautious of Lido’s stETH or other liquid staking tokens due to strict regulatory requirements. A 2023 report from Northstake found that around 1% of deposits to top liquid staking protocols came from illicit sources.
Even though it’s a small amount, it could cause problems for regulated institutions that need to adhere to strict anti-money laundering regulations.
Lido is looking at building out additional features, like segregated staking pools with know-your-customer checks, specifically for institutional clients affected by such regulations, Gilbert said.
To be sure, for many of Lido’s existing institutional clients, the lack of AML checks hasn’t prevented them from using the protocol.
“We believe Lido is already institutional-grade,” Gilbert said. “Around 25% of our total value locked today is actually institutional capital.”
TVL is a metric that tracks how much crypto is locked up in a DeFi protocol’s smart contracts, or in all DeFi protocols running on a given blockchain.
Looking for leverage
Another consideration is to ensure investors can use stETH in every way they want to.
At the top of many institutional investors’ wishlists is leverage. Top DeFi lending protocol Aave already has an established market for borrowing and lending stETH.
Lido’s recent partnership with digital asset software firm Fireblocks gives institutions even more options.
Institutions holding stETH can now use it as collateral on crypto exchange Bybit and crypto derivatives exchange Deribit through Fireblocks.
“We want to create as much opportunity for stETH holders, from an institutional perspective, to do as many cool things as they possibly can,” Gilbert said.
While giving institutions the option to take on leverage is great for luring them in, there are also downsides.
Leverage has also greased the wheels of every major crypto crash.
Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.
