Why did A16z invest $70 million in Lido Finance this week?
Venture capital firm Andreessen Horowitz (a16z) has invested $70 million in Lido Finance, a liquid staking provider. But what is the reason that the famous venture capital firm with $28.2 billion in assets under management decided to invest in this project?
Andreessen Horowitz invested $70 million in Lido
On March 3, a16z announced that it had invested $70 million in Lido Finance's governance token LDO. The company believes LIDO currently offers one of the easiest ways to stake ETH and other PoS assets. The venture capital firm also announced that it has used Lido to invest an undisclosed portion of a16z Crypto's Ether holdings on Beacon Chain.Lido is a liquid staking solution that lowers the 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, e.g. by lending your stETH to other users.
Why did a16z invest in this now?
The reason for the sudden investment seems to be the fact that the Ethereum blockchain plans to move from its current proof-of-work validation system to PoS this summer. This would be more efficient and allows 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 expectation that Ethereum will ship PoS this summer. A16z may believe that demand for staking, especially liquid staking, will increase.Lido's main competitor right now is RocketPool, which has a TVL of around $400 million. That's not nearly as much as Lido's $5.5 billion TVL on Ethereum alone. So this could also explain why A16z believes in the protocol, as it has a big lead over its competitors. In its blog post, the venture firm also explains that centralized staking services, decentralized staking pools and individual validators all play a role in securing Ethereum, so it does not believe one solution precludes the others. This means that while Lido is currently the largest staking provider, this doesn't mean that its competitors will stop competing.
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