Over the past few days, the Ethereum crypto community has voiced concerns about the growing power of Lido Finance in the liquid stakes market, which could lead to a high degree of centralisation in the network. With Lido controlling a significant portion of staked ETH, fears of network centralization are escalating, particularly regarding the potential manipulation of Ethereum’s transaction validation mechanism.
In response to these risks, four liquid staking providers have adopted a stratagem to limit the power of the validators: Lido, on the other hand, does not take kindly to this and decides to continue on its way. What will happen in this delicate situation?
All the details below.
Summary
Crypto: Lido’s market leadership in Ethereum Liquid Staking
The Lido Finance platform is breaking all records by establishing itself as the undisputed leader in the liquid Ethereum staking sector, where it remains the platform of choice for crypto investors. Since Ethereum’s transition from Proof of Work (PoW) to Proof of Stake (PoS), users without the required 32 ETH for direct staking have turned to third-party platforms like Lido to earn rewards while maintaining liquidity.
These platforms also offer a “liquid” cryptocurrency, whose countervalue is (almost) identical to the one deposited, which can be used to generate additional income in DeFi. Major exchanges such as Binance, Coinbase, and Kraken have adopted similar staking models, allowing users to stake ETH while retaining liquidity through exchange-issued tokens.
Lido stands out as the most popular decentralized option, with a total value locked (TVL) of $14.1 billion. The platform currently manages 8,551,078 staked ETH across 267,000 validators, commanding a 32.4% market share. In comparison:
- Unknown entities: 29.2%;
- Coinbase: 8.6%;
- Binance: 4.52%;
- Figment: 4.13%.
Over the past year, the protocol has more than doubled its LTV share from $6.95 billion to the current figure. Not even the collapse of the FTX cryptocurrency exchange could stop Lido, which recovered from its systematic decline in a matter of months and came back stronger than before.
Throughout 2023, the platform continued its ascent towards monopolising the liquid stakes sector, helped by the opening of withdrawals on the official Ethereum 2.0 platform. During this event, most of the stakers who had locked their ether on the protocol for more than two years without the possibility of redeeming it opted to switch to liquid solutions such as Lido in order to increase their annuities.
Proposals from 4 Ethereum liquid staking providers to limit validators’ power
Recognizing the risks of Lido’s growing dominance, several competing liquid staking providers,have pledged to cap their individual market shares at 22% to prevent excessive centralization. Specifically, Rocket Pool, StakeWise, Stader Labs, Diva Staking and Puffer Finance are mobilising to ensure that none of them will own more than 22% of the Ethereum staking market share.
Some protocols have already announced their commitment to self-limitation, while others have expressed support for the cause and said they will take action soon. Many experts in the Ethereum community, such as developer Superphiz, see coordination between the various players as crucial to the chain’s future success.
Too much polarisation of stakeholders delegating their ETH, and thus their consensus power, into the hands of a single individual could lead to problems in the block validation system, resulting in an arbitrary organisation of transactions on a blockchain. This has nothing to do with the functioning of the network and the ability to process transactions.
The self-limiting figure of 22% was chosen because a consensus of 66% is required to agree on the status of Ethereum and proceed to finalisation. However, if we look at the figures for the liquid staking platforms mentioned, we see that this threshold is far from being reached: Rocket Pool has a market share of 3% and StakeWise 0.3%, while Stader Labs Diva Staking and Puffer Finance do not even reach 0.1%.
Opting for this blockade is certainly not the ultimate solution to a very big ‘problem’, but it is certainly a first step towards collective awareness. According to many experts, it is pure madness to believe that Lido alone holds 33% of all ETH bets. On the other hand, many others believe that this is the normal law of the market and that a successful protocol cannot be prevented from reducing its profits.
We are talking about economic incentives: no ethics can beat this natural impulse towards money.
Lido disagrees and goes its own way: risk of centralisation for Ethereum’s block organisation mechanism
While the small fry in the Ethereum staking market are opting for self-limitation, Lido doesn’t even think about it and decides to go its own way and establish itself as DeFi’s main crypto protocol. In fact, back in June, a governance proposal by a user of the platform had called on LDO crypto holders to vote on a possible cap.
The results were obviously (for economic reasons) against the proposal, with 99.81% of participants voting against introducing thresholds to limit the protocol’s performance. Only 0.19% of the community voted in favour of this proposal.
The Lido issue opens up one of the most heated and interesting debates in Ethereum’s history, since the chain fork following the 2016 hack. Although what Lido is doing is completely in line with Ethereum’s ‘rules’, it is clear that if we continue in this direction, the risk of ecosystem collapse will become too great.
By reaching 66%, Lido would be able to decide for itself how to organise TXs within the blockchain and take advantage of the myriad profit opportunities that would result. All of this would result in a loss of value for the chain, which would effectively be governed by a single entity, contrary to the cherished principles of decentralisation and financial freedom.
Naturally, Lido wouldn’t want such an ending either, but it could generate a huge amount of money before the world leaves the Ethereum ecosystem. There are those who speculate as a solution to this problem the introduction of penalties for protocols such as Lido that jeopardise the consensus of the network.
In the modest opinion of the author of this article, echoing the words of Alessandro Mazza in one of his recent tweets, the solution is to ‘mobilise DAOs and big whales’. The big players in the staking of Ethereum should reflect and move to an alternative solution, which while guaranteeing a lower yield, would preserve an ecosystem that represents our future home on the web3.
Gentlemen, open your eyes and get out of the LIDO monopoly.
