Venture capital firm Andreessen Horowitz (a16z) has invested $70 million in Lido Finance, a liquid staking provider. But what is the reason why the famous venture capital firm with $28.2 billion in assets under management decided to invest in this project?
Andreessen Horowitz has invested $70 million in Lido
On March 3, a16z announced that it had invested $70 million in Lido Finance’s LDO governance token. The company believes that LIDO currently offers one of the easiest ways to stake ETH and other PoS assets. The venture capital firm also announced that it used Lido to invest an undisclosed portion of a16z Crypto’s Ether holdings on Beacon Chain.
Lido is a liquid staking solution that lowers barriers to entry for users who want to stake their ETH. Instead of staking ETH in multiples of 32, users can stake a fraction of ETH. While this allows users to earn a reward for their ETH, it also solves the illiquidity of their staked ETH, as it issues Lido’s own stETH. This is the tokenized version of Staked ETH, which can be used in other DeFi protocols to earn returns in addition to staking rewards, for example by lending your stETH to other users.
Glad to share this @a16z invested $70 million in @LidoFinance, one of the easiest ways to stake ETH and other PoS assets, and we used Lido to stake some of our ETH holdings on the Beacon chain. More than @DarenMatsuoka & @_PorterSmith: https://t.co/vc2tzDJ3mS
— cdixon.eth (@cdixon) March 3, 2022
Why did a16z invest in this now?
The reason for the sudden investment appears to be the fact that the Ethereum blockchain plans to switch from its current proof-of-work validation system to PoS this summer. This would be more efficient and allow users to validate transactions on the network. Currently, centralized exchanges are better able to provide staking services than decentralized competitors due to their efficiency. With the hope that Ethereum will ship PoS this summer. A16z can believe that the demand for staking, especially liquid staking, will increase.
Currently, Lido’s main competitor is RocketPool, which has a TVL of around $400 million. That’s not as much as Lido’s $5.5 billion TVL on Ethereum alone. So, this might also explain why A16z believes in the protocol, as it has a big lead over its competitors. In its blog post, the venture capitalist also explains that centralized staking services, decentralized staking pools, and individual validators all play a role in securing Ethereum, so it doesn’t think that one solution excludes the others. This means that while Lido is currently the largest staking provider, it does not mean that its competitors will stop competing.