Lido DAO has put forth a proposal to allocate up to 10,000 stETH for a buyback of its governance token, LDO, as it seeks to address what it describes as a historically low valuation. This initiative, estimated at around $20 million based on current ether prices, aims to stabilize the token’s market performance.
The challenge lies in executing this buyback effectively. According to the Lido Ecosystem Operations team’s proposal, the on-chain liquidity for LDO is currently limited, with only about $90,000 available at a price fluctuation of plus-or-minus 2%. This means that a transaction of the proposed size could significantly impact the token’s price.
To navigate this liquidity issue, the proposal suggests that the Lido Growth Committee conduct trades through centralized exchanges such as Binance, OKX, Bybit, Gate, and Bitget, all of which have greater liquidity depth exceeding $100,000. Additionally, the committee is authorized to collaborate with market-making partners to facilitate the buyback.
Data from CoinGecko indicates that LDO recently hit an all-time low of $0.27 on March 7, with its current trading price around $0.30. This represents a staggering decline of over 95% from its peak of $7.30 in 2021, leaving the token with a market capitalization of approximately $258 million. The proposed buyback could potentially consume about 65 million tokens, equating to roughly 8% of the circulating supply.
The rationale behind this buyback stems from a perceived disparity between LDO’s market performance and the underlying fundamentals of the Lido protocol. While the LDO-to-ETH ratio stands at around 0.00016—reflecting a 70% discount from historical levels—the protocol’s net rewards have only decreased by about 20% in the same timeframe. Furthermore, operational costs have improved by 13% year-over-year, and the effective take rate has risen from 5% to 6.11%. Lido continues to dominate the liquid staking sector, holding approximately 23% of staked ether, according to DefiLlama.
The proposal emphasizes that the current market situation is not merely a transient fluctuation but represents a significant disconnect between LDO’s price and the protocol’s fundamentals. Execution of the buyback would occur in batches of 1,000 stETH, each requiring a separate governance motion with a three-day objection window. The Growth Committee will have the discretion to determine the timing and pace of the buyback to minimize market impact, with slippage capped at 3% below the reference price.
This situation raises broader questions about the valuation of DeFi governance tokens. LDO’s drastic decline is notable, yet it is not unique within the sector. Despite Lido’s strong market position and consistent revenue generation, the market has substantially revalued governance tokens, particularly those that control fee structures without distributing profits.
Lido’s strategy aims to leverage this market dislocation as a buying opportunity, but its success will ultimately depend on whether the market recognizes the intrinsic value of governance tokens in the long term.
Lido DAO's proposal for a $20 million buyback of its governance token LDO aims to counteract a significant price drop. With liquidity challenges and a stark disconnect between market price and protocol fundamentals, the initiative raises questions about the future valuation of DeFi governance tokens.