Lido DAO suggests $20 million LDO repurchase to enhance value following 95% decline.

A proposed treasury buyback of as much as 10,000 stETH for LDO illustrates the current thin liquidity of DeFi governance tokens, compelling the DAO to utilize centralized exchanges for transactions.

Lido logo (Lido Finance)

What to know:

• Lido DAO has proposed to utilize up to 10,000 stETH (approximately $20 million) from its treasury to repurchase its LDO governance token, which it claims is currently trading at a historically low valuation.
• Due to the limited onchain liquidity for LDO, the strategy would involve processing batches of 1,000 stETH through centralized exchanges and market makers, potentially reducing around 8% of the circulating supply at present prices.
• The proposal highlights that LDO’s 95% price drop from its peak starkly contrasts with Lido’s robust fundamentals, raising broader concerns about whether DeFi governance tokens will ever be priced based on protocol performance rather than speculation.

Lido DAO has suggested spending up to 10,000 stETH to repurchase its governance token at what it considers a historically low valuation. This amounts to around $20 million at current ether prices near $2,000.

The challenge lies in where to allocate these funds.

According to the proposal released by the Lido Ecosystem Operations team over the weekend, onchain LDO liquidity stands at approximately $90,000 of depth at around 2%. This market depth metric indicates that a transaction of this size could shift the token’s price by as much as 2%.

A single batch of 1,000 stETH executed onchain would exceed the available liquidity multiple times, necessitating that Ethereum’s largest liquid staking protocol go offchain to acquire its own token at scale.

The proposal authorizes the Lido Growth Committee to process trades through centralized exchanges such as Binance, OKX, Bybit, Gate, and Bitget, each of which currently provides over $100,000 in liquidity. It also allows the committee to collaborate with market-maker partners on behalf of the Lido Ecosystem Foundation to facilitate trade execution.

Valuing governance

LDO reached an all-time low of $0.27 on March 7 and is presently trading near $0.30, based on CoinGecko data, with a market capitalization of approximately $258 million.

The token has declined over 95% from its peak of $7.30 in 2021. At current valuations, the proposed buyback could consume about 65 million tokens, or roughly 8% of the circulating supply.

The DAO’s argument is based on the disparity between token performance and protocol fundamentals. The LDO-to-ETH ratio is approximately 0.00016, reflecting a 70% discount compared to levels maintained for most of the past two years.

In contrast, net protocol rewards have decreased by only about 20% over the same timeframe, while costs have improved by 13% year-over-year, and the protocol’s effective take rate has increased from 5% to 6.11%. Lido continues to hold the largest portion of staked ether, approximately 23%, according to DefiLlama.

"This is not a routine fluctuation," the proposal asserts. "It signifies one of the most substantial dislocations between LDO’s market price and its underlying protocol fundamentals in the token’s history."

Execution would occur in 1,000 stETH batches, each necessitating a separate Easy Track motion—a governance mechanism for routine or approved actions—with a three-day objection period. The Growth Committee retains the authority over the timing and speed of transactions to avoid signaling specific moves to the market, which is a necessary precaution given the public nature of the proposal. Slippage is limited to 3% below the reference price.

The deeper issue raised by the proposal is one that affects DeFi governance tokens in general. LDO’s 95% decline from its peak is severe, but it is not unique within this category. A protocol that leads its sector, generates consistent fees, and holds billions in total value locked is currently valued at a $258 million market cap because the market has broadly reassessed the worth of governance tokens that control a fee switch but do not distribute any earnings.

Lido’s response is to view the dislocation as an opportunity to buy. Whether this strategy proves effective depends on the market’s eventual decision on whether governance tokens should be valued based on fundamentals.