Lido is the leading liquid stake service provider for Ethereum. Its market share has reached 33%. It is this situation that has led to concerns regarding centralization.
Lido has a stake market share of 31.76% at the time this article was written. Lido holds almost a quarter of Ethereum’s staked ether.
Danny Ryan, a researcher at the Ethereum Foundation, wrote in a blog posted for 2022 that, if an LSD (liquid staking derivative) exceeded the threshold of 33%, then it could theoretically manipulate the block space and create an economic monopoly.
Mike Neuder from the Ethereum Foundation also shares the same sentiment. He identified in a post on his blog three possible attack vectors for the Ethereum network. These are holders of Lido’s stETH, operators running validators, and Lido’s DAO.
Neuder writes that DAO is the most dangerous of all three. “soft power” Members of the DAO could have an unwarranted influence on protocol.
Blockworks conducted interviews with people who have raised concerns about Lido dominance, and also members of Lido Development Team who believe that Ethereum’s security is not threatened as much as claimed.
Why Lido might present cause for concern
Several funds are among the largest holders of Lido DAO tokens. According to Arkham Intelligence, Paradigm owns 7% of Lido DAO’s total token supply, which makes it the second largest whale. FalconX, Dragonfly Capital and others are among the largest holders of LDO.
Ian Unsworth said, a contributor for the liquid stake company Stride, that the funds which hold Lido (LDO), tokens, are unlikely to sell their holdings or to maliciously attack DAO. Still, investment funds have to return value to clients, and value creation could, someday, theoretically conflict with the principles of Ethereum.
“At the end of the day, you should probably assume everyone is a profit maxi,” Unsworth is said. “People aren’t going to [govern the DAO] because they like the ethos.”
Nixo is the pseudonymous Executive Director of EthStaker. He said the DAO cannot stop profit maximization if it means passing proposals that degrade Ethereum.
DAO members usually delegate their votes to the larger holders. This means that proposals may pass with little attention. Nixo warned that this could result in undercover misdeeds.
“It could be Apple knocking on the door and saying, ‘Hey, we would really like to push this [proposal] through in some sort of clandestine way,'” Nixo added that DAOs could punish operators for acting against their will.
Ryan’s blog stated that Lido is able to do greater damage by attacking Ethereum or censoring its transactions at staked validator shares of 66% and 50%. Nixo claimed that 33% dominance could signal to bad actors the possibility of higher thresholds, without excessive resistance from the community.
Even if Lido’s DAO is composed of model Ethereans, growing dominance from the liquid staking provider threatens one of the network’s chief value propositions — its censorship resistance.
“[Lido dominance] erodes the credible neutrality of Ethereum, which in turn devalues Ethereum itself,” Kevin Weaver is a Metropolis backend engineer.
Lido’s answer to Centralization Concerns
Kasper Rasmussen is a Lido community contributor. He told Blockworks Lido was an intermediary layer which facilitates the interaction between Ethereum users, and well-known, transparent Node Operators.
“This 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,” Rasmussen said.
Rasmussen stated that dual governance would allow for a broader community to be governed. Dual governance means LDO holders are not the only ones with governing power — Lido staked ether (stETH) holders can apply veto to votes if they choose to.
This allows stETH token holders to be involved in protocol governance even if they don’t hold LDO.
“This ensures the protocol remains transparent, accountable and representative of the entire user base,” Rasmussen said.
Lido is working on expanding the Lido Protocol validator’s set. Rasmussen stated that the team added seven node operators in September.
“This diversification serves as a protective measure against any single entity gaining control,” “He said”
Lido as an ‘ideal’ villain for Ethereum?
Ethereum has been buzzing about the idea of enshrining decentralization for liquid staking in its protocol code. The enshrinement of liquid staking decentralization in the protocol’s code has generated buzz among Ethereum circles.
Lido’s DAO was also considering, but ultimately rejected, an idea that would limit its staking dominant.
Lido is aligning itself with Ethereum’s values, whether it be through code updates or social pressure. Nixo believes that Lido’s dominance is a problem. “ideal actor to be in the villain position” Ethereum.
“This is highlighting a problem that the Ethereum protocol has — it’s not a problem of an evil actor coming in,” Nixo says: “So in a way this is good that this is happening…the 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.”
Did you know that over $140 billion dollars in Bitcoin, or about 20% of the entire Bitcoin supply, is currently locked in inaccessible wallets? Or maybe you have lost access to your Bitcoin wallet? Don’t let those funds remain out of reach! AI Seed Phrase Finder is here to help you regain access effortlessly. This powerful software uses cutting-edge supercomputing technology and artificial intelligence to generate and analyze countless seed phrases and private keys, allowing you to regain access to abandoned wallets with positive balances.
