Lido community proposes capping the protocol’s stake in Ethereum 2.0 staking

The decentralized organization behind the Lido Finance project has initiated a vote on limiting the protocol’s share in the Ethereum 2.0 staking pool.

Should Lido on Ethereum self-limit?

A multi-leg vote has been set up to determine whether or not Lido should limit itself to a share of staked ETH and, if so, how. https://t.co/WbvuX69JfC

Start: 24.06 / 9AM UTC
End: 01.07 / 9AM UTC pic.twitter.com/U4uUZYzfaw

— Lido (@LidoFinance) June 24, 2022

Lido Finance — service for liquid staking of cryptocurrencies. The protocol allows depositing coins into the relevant contract and receiving in return a quantity of “derivative” tokens, which can be used in DeFi services. In the case of Ethereum, these are stETH tokens.

According to Dune Analytics, Lido accounts for over 31% of all ETH in staking.

In the discussion preceding the vote, the authors of the proposal noted that eminent community members recommended limiting the share of a single protocol in staking.

For example, Ethereum cofounder Vitalik Buterin stated that no more than 15% of ETH should be attributed to a single project.

Speculative controversial take: we should legitimize price gouging by top stake pool providers. Like, if a stake pool controls > 15%, it should be accepted and even *expected* for the pool to keep increasing its fee rate until it goes back below 15%. https://t.co/cOtuM7Occd

— vitalik.eth (@VitalikButerin) May 14, 2022

The authors of the proposal argue that Lido’s dominance in the Ethereum 2.0 staking pool would pose a security threat to the blockchain after the so-called The Merge.

Lido passing 1/3 is a centralization attack on PoS.

We’re bad at assessing tail risk, but staking in Lido at these thresholds has a lot of it.

In blockchain systems, tail risk isn’t even necessarily so far fetch. Systems tend to hit edge cases, systems tend to get exploited 1/2

— dannyryan 🧱🔥 (@dannyryan) May 10, 2022

The vote will close on July 1. If the Lido DAO approves the proposal, the authors will initiate another discussion on how exactly developers will limit the protocol’s participation in staking.

In June 2022 the stETH discount exceeded 5%. At the time of writing, derivative tokens trade about 4% below native Ethereum coins (decentralized exchange Curve). 

CoinShares analysts urged not to compare the stETH situation with the Terra ecosystem collapse.

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