<\/p>\n
Lido, the largest liquid staking service provider on Ethereum, is approaching 33% market dominance. This state of affairs has raised concerns about centralization and the protocol being a threat to Ethereum\u2019s security.<\/p>\n
At the time of writing, Lido\u2019s staking market share sits at 31.76%. This means that of all the staked ether on Ethereum, almost one-third of it is staked with Lido.\u00a0\u00a0<\/p>\n
Danny Ryan, an Ethereum Foundation researcher, noted in a 2022 blog post<\/a> that if a liquid staking derivative (LSD) exceeds the 33% threshold, it has the theoretical capability to manipulate block space, potentially creating an economic monopoly.\u00a0<\/p>\n This sentiment is shared by the Ethereum Foundation\u2019s Mike Neuder, who identified in a blog post<\/a> three possible attack vectors on the network: holders of Lido\u2019s stETH product, node operators who run validators for the network, and Lido\u2019s DAO<\/a>.\u00a0<\/p>\n Of the three, Neuder said the DAO presents the greatest risk, writing that the \u201csoft power\u201d held by DAO members would allow them undue influence over the protocol.<\/p>\n In a series of interviews, Blockworks spoke with those who\u2019ve raised the alarm that Lido\u2019s dominance may be a pernicious force, as well as members of the Lido development team who argue that the threats to Ethereum\u2019s economic security are overstated.\u00a0<\/p>\n Read more:<\/strong> Lido Finance drops Solana staking after DAO decision<\/a><\/p>\n Lido DAO\u2019s largest token holders include several funds. Paradigm holds 7% of the total supply of LDO, Lido\u2019s governance token, making it the second-biggest whale, according to a dashboard<\/a> from Arkham Intelligence. FalconX and Dragonfly Capital are also among the top holders of LDO.<\/p>\n Ian Unsworth, contributor to the liquid staking firm Stride, said the funds holding Lido (LDO<\/a>) tokens are unlikely to liquidate their positions or maliciously attack the DAO. Still, investment funds have to return value to clients, and value creation could, someday,\u00a0 theoretically conflict with the principles of Ethereum<\/a>.<\/p>\n \u201cAt the end of the day, you should probably assume everyone is a profit maxi,\u201d Unsworth said. \u201cPeople aren\u2019t going to [govern the DAO] because they like the ethos.\u201d<\/p>\n If profit maximization means passing proposals meant to degrade Ethereum for personal gain, the DAO is not equipped to stop it, according to Nixo, the pseudonymous executive director of EthStaker.\u00a0<\/p>\n DAO members typically delegate votes to larger holders, meaning proposals can pass without much attention. This could lead to under-the-radar misdeeds, Nixo said.<\/p>\n \u201cIt could be Apple knocking on the door and saying, \u2018Hey, we would really like to push this [proposal] through in some sort of clandestine way,\u2019\u201d Nixo said, adding that nefarious DAO actors could also punish node operators who act against their wishes.<\/p>\n Notably, the damage Lido\u2019s ability to censor transactions or attack Ethereum grows<\/a> at 50% and 66% of staked validator share, according to Ryan\u2019s blog post. Nixo said hitting 33% dominance would signal to potential bad actors that higher thresholds are possible without excessive community pushback.\u00a0<\/p>\n Even if Lido\u2019s DAO is composed of model Ethereans, growing dominance from the liquid staking provider threatens one of the network\u2019s chief value propositions \u2014 its censorship resistance.<\/p>\n \u201c[Lido dominance] erodes the credible neutrality of Ethereum, which in turn devalues Ethereum itself,\u201d Kevin Weaver, a backend engineer at Metropolis, said.\u00a0<\/p>\n Kasper Rasmussen, a Lido Community Contributor, told Blockworks that Lido itself is an intermediary layer that facilitates interaction between Ethereum users and transparent, well-known Node Operators (NOs).<\/p>\n \u201cThis process is underpinned by a network of 37 legitimate and autonomous NOs. These NOs are not only geographically dispersed, but each of them individually holds less than 1.5% of the total staked assets,\u201d Rasmussen said.\u00a0\u00a0<\/p>\n Broader community governance will be achieved through the development of dual governance, Rasmussen said. Dual governance means LDO holders are not the only ones with governing power \u2014 Lido staked ether (stETH<\/a>) holders can apply veto to votes if they choose to.\u00a0<\/p>\n This means it\u2019s possible for stETH holders to engage in protocol governance without holding LDO tokens.\u00a0<\/p>\n \u201cThis ensures the protocol remains transparent, accountable and representative of the entire user base,\u201d Rasmussen said.<\/p>\n The Lido team is also working to expand the Lido Protocol\u2019s validator set. In September, it onboarded seven new node operators, Rasmussen noted.<\/p>\n \u201cThis diversification serves as a protective measure against any single entity gaining control,\u201d he said.<\/p>\n Enshrining liquid staking decentralization in the protocol\u2019s code<\/a> has generated buzz in Ethereum circles. Enshrinement could theoretically implement protocol updates that would make it impossible for liquid staking to become overly centralized.\u00a0<\/p>\n Lido\u2019s DAO also considered, and ultimately rejected, a proposal<\/a> that would have self-limited its staking dominance.\u00a0<\/p>\n Whether the solution to Lido dominance is reached through social pressure or by code updates, Lido says it is taking steps to stay aligned with Ethereum\u2019s ethos. For this reason, Nixo said Lido is an \u201cideal actor to be in the villain position\u201d on Ethereum.<\/p>\n Read more:<\/strong> Ethereum is \u2018much more centralized than folks realize\u2019: Blocknative\u2019s Matt Cutler<\/a><\/p>\n \u201cThis is highlighting a problem that the Ethereum protocol has \u2014 it\u2019s not a problem of an evil actor coming in,\u201d Nixo said. \u201cSo in a way this is good that this is happening\u2026the fact that ideas like that are coming to the surface in light of this debate from all sorts of sources is exactly what this social layer is meant to elicit.\u201d<\/p>\n Updated Oct. 20, 2023 at 11:30 am ET: A previous version of this article attributed information to \u201cthe company\u201d instead of a \u201cLido contributor.\u201d<\/em><\/p>\n Updated Oct. 20, 2023 at 11:12 am ET: Clarified for additional context.<\/em><\/p>\n Don\u2019t miss the next big story \u2013 join our\u00a0free daily newsletter<\/a>.<\/strong><\/p>\nWhy Lido might present cause for concern<\/h2>\n
Lido\u2019s response to centralization concerns<\/h2>\n
Lido as an \u2018ideal\u2019 villain for Ethereum?<\/h2>\n
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