Lido announced that it will make it possible to trade a wrapped version of staked Ether (stEth) on Layer-2 solutions for Ethereum. This will make it cheaper for users to move around their stEth and, for example, generate yield on it.

Lido, like its competitor Rocket Pool, is a so-called liquid staking pool. It's a place where ETH holders can deposit their ETH to accrue future staking rewards. As these rewards will only be released around six to twelve months after the Ethereum merge (which is scheduled coming September), the liquid staking pool hands out a token in return for each deposited Ether: staked Ether (stEth). This token is then free to be moved around and traded: hence the denominator 'liquid': it makes the locked up Ether free to move.

Not really though. The staked Eth token is just a derivative token and there is no guarantee that the price is exactly equal to the price of Eth. Indeed, during the crypto sell-off last June, stEth briefly traded around 0.94 Eth. There simply wasn't enough liquidity to satisfy all the sellers of stEth. At the time of writing, stEth is trading around 0.98 Eth. The reason that the price in general won't exactly equal 1 Eth, is that there is some residual risk: counterparty and smart contract risk mostly: we have to trust Lido and their competitors that they don't get hacked, for example.

About Layer 2's

Layer 2 (L2) solutions of Ethereum (for example Polygon) batch transactions in such a way they don't clog the Ethereum blockchain. This makes Layer 2's orders of magnitude cheaper to use, with the trade-off that users give up a little bit of the security that comes with not transacting on Ethereum itself.

Lido asserts that it will begin by supporting wstETH bridging and staking on Layer 2 networks. After that, it will allow staking of ETH held by users on L2 networks directly from that L2 without the need to bridge their assets back to Ethereum Mainnet.

A logical step

By allowing a wrapped version of stEth on Ethereum L2's, staked ETH will get more prominence, and more liquidity. It's a logical step for protocols like Lido to allow their tokens to be saleable on L2's: it is the expectation that more and more transactions will take place on Layer 2's.

Lido didn't announce yet in what order which Layer 2's will become available.

Lido's own token, LIDO, rallied last week, similar to many projects in the Ethereum ecosystem. ETH is up more than 70% from its recent low, LIDO more than 200%.