I would like to know the way Lido provides staking rewards to stETH token holders.
Does the stETH balance automatically update for users? That is, does the balanceOf function returns increasingly higher amounts without users performing any action?
I'm particularly interested in the technical mechanism behind how the stETH token balance increases, rather than the staking process itself.
Yes, that is exactly what happens.
stETH is a 'rebasing' token. Here's a relevant excerpt from the Lido docs:
The mechanism which updates the stETH balances every day is called a “rebase”.
...
Because stETH rebases daily, it communicates the position of the share daily
If you want a token that does not rebase, you can use wstETH, which is the wrapped version of stETH that accumulates rewards without updating the user balances.
