Lido’s core strategy is to simplify complex and technical operations into straightforward, tokenised products—the DAO’s flagship product stETH packages the technical intricacies of staking into a single fee-based liquid staking solution. This streamlined user experience is a significant factor to Lido’s success, creating broad demand from users who might not otherwise access these opportunities.
To augment Lido’s Product Line strategy, a performance-based capital allocation framework ****is proposed. Under this mechanism, whitelisted and LDO-bonded capital managers bid on the yields they can deliver over an epoch. Within the constraints of specific yield categories (such as restaking, leveraged staking, etc.) these managers are free to employ the most advantageous yield-generating strategies across DeFi. Capital managers are held accountable on-chain by scoring their performance and risk measures and implementing slashing of their posted bond in the off chance the managers commit actions harmful for the DAO.
By allocating capital to multiple whitelisted managers, the DAO can foster a competitive ****ecosystem that rewards stable, predictable returns and strong risk management. This approach also frees the DAO from building every new yield generation innovation in-house, enabling Lido to stay at the forefront of DeFi without sacrificing the user-centric principles that have guided its growth thus far.
Lido’s DAO chooses 5 or more capital managers following a Request For Proposals (RFP) for allocation of capital. The capital is sourced from user deposits into the tokenised strategy entry point. The epochs are spread out into two sections:
The auction involves bids of expected yield during the allocation epoch. The DAO allocates capital equally across all participating capital managers. At the end of the allocation epoch, every manager’s performance is scored via a formula described in this document. Capital for the upcoming epoch is allocated proportional to the normalised scores of each capital manager from their performance in the previous epoch.
Bids must be above the Bid Floor
Each capital manager’s bid must be above the floor value that is set and controlled by the DAO, computed as:
$$ Y^i_{\text{promised}} > \max(Y_{\text{risk-free}} + Y_{\text{premium}}, \text{ median}(Y^{(i-1)}_{\text{realised}})) $$
where,
$Y^i_{\text{promised}}:$ the yield that a capital manager promises
$Y_{\text{risk-free}}:$ a 7-day Exponential Moving Average of stETH base yield
$Y_{\text{premium}}:$ A DAO-settable premium
$\text{ median}(Y^{(i-1)}_{\text{realised}}):$ The median value of realised yields in the previous epoch $(i-1)$
The risk-free rate $Y_{\text{risk-free}}$ is set as the 7-day exponential moving average of the stETH base rate. The DAO has the ability to update the expected premium of the strategy at the start of the upcoming epoch via public decentralised voting—this ensures capital managers are cognisant of expected changes in the future.
The auction does not decide capital allocations directly. The yield promised (or bid) $Y_{\text{promised}}$ is factored against the capital manager’s performance to come up with a final score. This score decides allocation at the start of the new epoch.