Lido Proposes Automated LDO Buyback to Strengthen Liquidity

Key Highlights

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  Lido plans automated LDO buybacks using NEST, with trades limited to 2% market impact to reduce price fluctuations.
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  The proposal includes a liquidity pool pairing LDO with wrapped stETH (wstETH) to improve on-chain trading and token utility.
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  Buybacks are anti-cyclical, triggered only when Ethereum is above $3,000 and DAO revenue exceeds $40 million, with annual buybacks capped at $10 million.

Lido's Plan for LDO Token Support

Ethereum staking platform Lido has unveiled a proposal aimed at supporting the market for its LDO token. The plan, which is being discussed on the Lido DAO Forum, focuses on establishing an automated system for buying back LDO tokens. This initiative intends to reduce the circulating supply of LDO while simultaneously facilitating easier trading of the token on the blockchain. If approved by the community, this system could be operational as early as the first quarter of 2026.

Automated Buyback Mechanism

Lido intends to leverage the NEST protocol for executing these buybacks. NEST enables direct, on-chain trading without the need for centralized exchanges. To mitigate significant price volatility, the DAO would conduct buybacks in smaller tranches, referred to as “clips.”

According to the proposal, trades could occur up to 14 times annually, with each trade involving 350,000 LDO clips. Crucially, each transaction is designed to impact the LDO price by no more than 2%, excluding transaction fees.

The system aims to balance two competing factors: slippage, which is the difference between the expected and actual trading price, and gas fees, the cost associated with executing transactions on the Ethereum network. Executing smaller trades more frequently can reduce slippage but increases overall gas costs. Conversely, larger trades are more cost-effective in terms of fees but carry a higher risk of price movement.

Given the limited supply of LDO tokens, the DAO must avoid large, singular buybacks that could disrupt market dynamics on both decentralized and centralized exchanges. To prevent such disruptions, the buyback mechanism will only activate under specific market conditions: Ethereum's price must be above $3,000, and the DAO's annual revenue must exceed $40 million.

Operational Parameters for Buybacks

The proposal outlines specific parameters to govern the operation of the buyback system:

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  Ethereum Price Threshold: Buybacks will only be initiated if Ethereum is trading at a price above $3,000.
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  Revenue Threshold: The buyback system will activate only when the DAO's annual revenue surpasses $40 million.
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  Distribution Rate: 50% of treasury inflows exceeding $40 million will be allocated to buybacks.
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  Market Impact Cap: Each individual trade is restricted to affecting no more than 2% of LDO's total liquidity.
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  Annual Maximum: The total value of LDO bought back will be capped at $10 million within any rolling 12-month period.

This design makes the system anti-cyclical, meaning buybacks will naturally increase during periods of high Ethereum prices and revenue, and decrease during market downturns. This approach aims to prevent the removal of excessive tokens during unfavorable market conditions.

Current projections suggest that this mechanism could lead to approximately $4 million in buybacks annually, executed across at least 12 trades, with each trade potentially utilizing up to 100 stETH.

Introduction of a Liquidity Pool

In addition to buybacks, the proposal includes the establishment of a liquidity pool that will pair LDO with wrapped stETH (wstETH). A liquidity pool serves as a shared token reserve, enabling traders to execute trades more efficiently without direct reliance on individual market participants.

A portion of the LDO acquired through NEST buybacks will be combined with wstETH in a Uniswap v2-style pool. This strategy is designed to progressively increase the availability of LDO for on-chain trading while still reducing its overall circulating supply. The initiative aims to enhance token utility and liquidity, rather than solely focusing on profit generation.

The initial liquidity pool is planned to start with approximately $400,000 from the DAO treasury, comprising 50 stETH and 200,000 LDO. The DAO will earn a nominal fee for managing this pool. Over time, more frequent trades within the pool are expected to minimize price impacts and improve the ease of LDO utilization on-chain.

Process Execution and Governance

The NEST contract will be integrated and managed using EasyTrack, a system that supports both automated and manual trade execution.

A segment of the DAO's treasury will be allocated to purchase LDO via Stonks v2, a trading platform. These acquired LDO tokens will then be paired with wstETH to supply liquidity to the designated pool.

The resulting liquidity pool tokens will be returned to the Aragon Agent, a smart contract controlled by the DAO. Should a greater amount of wstETH be required, additional treasury funds can be deployed, and the process will be repeated. The DAO will maintain full ownership of the pool, ensuring continued control by token holders.

The proposal is currently open for discussion on the Lido DAO Forum, inviting community members to share their feedback on the proposed mechanism, parameters, and any alternative suggestions. Following the discussion period, the proposal is expected to proceed to a formal vote on Snapshot, the DAO's primary voting platform.

In summary, this proposed system offers the DAO a structured and effective method for treasury management. By integrating automated buybacks, liquidity pools, and market-responsive rules, Lido aims to bolster the stability of the LDO token, enhance its on-chain utility, and carefully manage its total supply.