Opinion: Yes, Lido poses a risk to Ethereum. But there are solutions

Written by Mel Gelderman

Posted on October 12th, 2023

Mel Gelderman weighs in on the debate surrounding Lido and its growing dominance over Ethereum staking.

Debate is raging in the Ethereum community as Lido extends its dominance. Lido now accounts for almost ⅓ of all ETH staked, creating a centralisation risk for the top smart contract protocol. Lido has got to this position because people are economically incentivised to use it. But people are right to call out the risks. Fortunately, there are solutions—but an overnight fix isn’t likely. 

Is Lido attacking Ethereum? 🤺

Lido is one of the most successful projects to launch on Ethereum. It issues ETH stakers a liquid token called stETH that can be used across DeFi, meaning they can earn extra rewards. Lido helps Ethereum users get the most out of their capital, which is great. But its success has come at a cost to Ethereum’s decentralisation. The more validators Lido runs, the more centralised Ethereum becomes, and the easier it gets to coordinate an economic attack. This is a problem. 

“Lido’s success has come at a cost to Ethereum’s decentralisation.”

Some of Ethereum’s key voices have recently expressed concern with Lido’s growth. Ethereum creator Vitalik Buterin penned a blog post explaining how liquid staking projects create centralisation risks. Ethereum Foundation researcher Danny Ryan has argued that Lido is making “an attack” on the system. “Everyone should be making conscious decisions about capital allocation so the system can move forward,” he said on the Web3 Builders podcast. 

Vitalik Buterin has suggested that enshrining new features into Ethereum could prevent the centralisation risks caused by projects like Lido (​​Photo: David Paul Morris/Bloomberg)

Potential solutions 🤔

But there are solutions. In his post, Vitalik weighed the idea of adjusting the Ethereum protocol to make liquid staking less centralised. A new project called Diva is plotting a so-called “vampire attack,” paying people tokens to leave Lido and use theirs instead. In the future, running independent nodes should become simpler and more accessible, which will make it easier for people to contribute to Ethereum’s decentralisation. 

“It’s good for the whole token ecosystem if Ethereum stays as decentralised as possible.”

“Attack” or not, whichever side you take, few would deny that one project controlling so many validators presents a risk. It’s good for the whole token ecosystem if Ethereum stays as decentralised as possible. There’s good reason to believe that solutions will come—but people should be aware that fixes may take some time. 

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