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Understanding the Stakes in Lido’s Growing Share of Staked ETH

None of the information contained here constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy.

With the full power of ETH staking unleashed with the ability to withdraw, staking dynamics have become a focal point of discussion within the Ethereum community. Lido stands as the leading staking platform offering users the ability to stake their Ethereum (ETH) holdings and in return, receive stETH, a liquid staking token. The rise of Lido has been attributed to the ease of staking and liquidity stETH provides, allowing it for a large set of users in DeFi. The result is that Lido has grown to preside over a significant share of all the Ethereum staked.

Lido has captured around 30% of ETH staking share.

This has become a growing source of concern within the larger Ethereum community. The crux of the issue lies in the risks of centralization associated with Lido’s dominance in ETH staking. Lido dominance could potentially stifle competition, hinder the entry of new decentralized staking solutions, and at worst, it could pose a threat to network security.

With regulatory bodies scrutinizing staking platforms, especially those with a large market share, the broader Ethereum and DeFi ecosystem could face repercussions in the event of issues or even willful actions from token holders, because of stETH and its prevalence in the market.

Community and Developer Response

The concerns have not fallen on deaf ears. Several initiatives are underway to address the centralization issue. The Ethereum community has taken up both sides of the issue. Those arguing that Lido is getting too large have explored various solutions:

Self Limiting

In this case, Lido would vote to cap their deposits at a set percentage of total stake. But LDO holders already voted down a previous proposal on this decision, and users have continued to vote with their money by depositing ETH in the protocol. Some people have been acting on this through social consensus, with Lido’s rejection from the first round of Arbitrum grants a signal that some parts of the community are actively working to limit Lido’s further growth.

Better Products

Some builders have taken it upon themselves to release competing products. Whether aiming to be more decentralized like rETH, or with higher yield like sfrxETH, the various other liquid staking protocols have all been vying for staking share in their unique ways.

Protocol Level Limiting

Perhaps a drastic solution, but one that has been discussed, is limiting the share of stake at the protocol level. This would require lots of work and planning for the protocol development teams, but could cut right to the core issues.

Wait and see

There are some voices that suggest the problem isn’t really a problem. Maybe over time the issue will resolve itself as the market matures.

For their part, Lido has been proactive in discussing and working towards solutions. There are already clear plans on the roadmap to address decentralization of both votes and node operators. Lido is also planning to introduce dual voting that will allow stETH holders to have a say and potentially a veto in protocol governance. It remains to be seen if these steps will be sufficient to alleviate the concerns.

Bringing The Community Together

The unfolding narrative around Lido’s dominance in Ethereum staking through stETH is reflective of a larger dialogue concerning decentralization in the blockchain sphere. As Ethereum continues to evolve, so does the discourse around decentralized staking solutions. If some of the critics are right, it could represent an existential threat to the Ethereum network. We trust in the builders and community members who are all working towards better versions of this new technology. The Lido controversy should serve as a catalyst towards creating a more diversified and decentralized staking ecosystem that represents the diverse voices of Ethereum’s community.