Lido DAO proposed spending up to 10,000 stETH to purchase its own governance token at what it calls a historically depressed valuation. That equates to approximately $20 million at current ether prices near $2,000.
The problem is where to spend it.
On-chain LDO liquidity sits at around $90,000 deep at plus or minus 2%, according to the proposal released by the Lido Ecosystem Operations team over the weekend. The depth of market measure means that a transaction of that value could move the price of the token by up to 2%.
A single batch of 1,000 stETH executed on-chain would consume available liquidity several times over, meaning Ethereum’s largest liquid staking protocol has to go off-chain to purchase its own token at scale.
The proposal authorizes the Lido Growth Committee to route trades through centralized exchanges, including Binance, OKX, Bybit, Gate, and Bitget, each of which currently offers more than $100,000 in depth. It also allows the committee to engage market-making partners on behalf of the Lido Ecosystem Foundation to facilitate execution.
Value governance
LDO hit an all-time low of $0.27 on March 7 and is currently trading near $0.30, according to data from CoinGecko, with a market capitalization of approximately $258 million.
The token is down more than 95% from its 2021 high of $7.30. At current prices, the proposed buyback could consume approximately 65 million tokens, or about 8% of the circulating supply.
The case for the DAO rests on a gap between the token’s performance and the protocol’s fundamentals. The LDO-ETH ratio sits at approximately 0.00016, a 70% discount to levels held for most of the past two years.
The protocol’s net rewards, by contrast, have fallen only around 20% over the same period, while costs improved 13% year over year and the protocol’s effective acceptance rate increased from 5% to 6.11%. Lido still holds the largest proportion of ether stake, around 23%, according to DefiLlama.
“This is not a routine fluctuation,” the proposal states. “It represents one of the most significant dislocations between the market price of LDO and the fundamentals of its underlying protocol in the history of the token.”
Execution would occur on 1,000 lots of stETH, each of which would require a separate Easy Track movement (a governance mechanism for routine or approved trades) with a three-day objection period. The Growth Committee retains discretion over timing and pace to avoid signaling exact moves to the market, a necessary precaution given that the proposal is public. Slippage is capped at 3% below the reference price.
The deeper question the proposal raises is one facing DeFi governance tokens in general. The 95% LDO drop from peak is extreme, but not an outlier in the category. A protocol that dominates its sector, generates constant fees, and has billions in TVL is trading at a market cap of $258 million because the market has greatly revalued the value of a governance token when it controls a fee change but does not distribute anything.
Lido’s response is to treat the dislocation as a buying opportunity. Whether that works depends on whether the market ever decides that governance tokens deserve to be traded based on fundamentals.
