Members of the Ethereum community: Will Lido pose a risk to the Ethereum ecosystem?

Original compilation: Kaori, BlockBeats

Last week, Ethereum LSD protocols such as RocketPool, StakeWise, and Stader Labs promised to limit the share of verifiers to less than 22%, while Lido Finance, the market leader with a share as high as 32%, did not comment on this. The topic of risks posed by the Ethereum ecosystem has once again sparked discussion.

Ethereum community member Ryan Berckmans (@ryanberckmans) sees the risk of Lido’s uncapped dominance that Ethereum could be seen as controllable, or superior to other blockchains, in the eyes of large corporations and governments. Much more centralized. If this is the case, the speed of development of Ethereum may be greatly affected, which will limit the benefits of Ethereum to human beings and reduce the value of ETH.

Lido ecosystem contributor sacha (@sachayve) published an article to refute Ryan’s many concerns based on treating Lido as a single entity, but Lido is actually a coordination layer between multiple participants, explaining to institutions that Lido is not a single entity. It is not difficult, especially when LDO governance rights are greatly weakened and restricted by stETH holders.

In response to sacha’s response, Ryan published a second article to refute. He believed that a monopolistic LSD (22% + share) protocol, no matter how it is designed, will definitely reduce the credibility and neutrality of Ethereum, but the Lido team chose to ignore it. This, and the refusal to take the most direct way (self-imposed restrictions) to restore neutrality to Ethereum, is the main reason for the Ethereum community’s growing distrust of Lido.

BlockBeats organizes the remarks of the two as follows.

Ryan: Lido’s uncapped dominance is the only serious and lasting risk between Ethereum and global adoption

In my opinion, the most realistic worst-case scenario for Lido’s uncapped dominance is not a network outage, but building a reputation among businesses and governments that Ethereum is “controlled” or “relative to other chains.” , in fact, it is not that decentralized.”

If this happens, it could affect the order of magnitude of the growth rate of Ethereum, which in turn affects the interest of Ethereum and the fraction of ETH’s long-term valuation.

Ethereum is a very low tps chain, but it has the most secure block space “by far”. This reputation is critical to the future of the L1 and L2 ecosystem.

Our forecast valuation of ETH is based on the government anchoring its sovereign bond system on Ethereum’s low-data, high-cost chain, and then bridging it to many L2s and L3s. Compared with anchoring it on a higher tps chain, the latter obviously has higher risks and poorer long-term property rights, and the former is obviously more beneficial.

Ethereum is on its way to becoming a global settlement layer, but that success depends on our reputation among businesses and governments. Given this path dependency, Lido alone threatens our reputation. This is the difference when comparing it with Google’s search monopoly. Google does not “threaten” the Internet like Lido, making the impact of the Internet much smaller.

Currently, Lido uncapped dominance is the only known material risk that could leave Ethereum worth only $1.2 to $3 trillion in ten to fifteen years, rather than $12 to $30 trillion. This is why we cannot tolerate Lido’s uncapped dominance – it is literally the only serious and lasting risk between Ethereum and global adoption.

Our mission is to create a level playing field for all mankind. In order to achieve this goal, we do not hesitate to endure social friction and urge Lido to control 22% of the market share through floating agreement fees.

sacha: Why Ryan’s concerns about Lido’s growth affecting Ethereum’s reputation are wrong

While Ryan acknowledged that “the most realistic worst-case scenario for Lido’s uncapped dominance is not network disruption,” the core of his argument for self-limitation is the reputational damage Ethereum could suffer if Lido’s market share continues to grow. In particular, he worries that this could impact Ethereum’s growth, which in turn could limit its adoption (“good for humanity”) and market capitalization (“the number of zeros behind long-term ETH valuations”).

In his view, compared with other higher tps chains, the key difference of Ethereum is that it provides users with better and safer long-term property rights.

Of course, the counter-argument here is that if Lido doesn’t follow the wishes of a handful of core developers, researchers, influencers, threatening to restrict, fork Ethereum, is the surest way to kill any notion of better and safer property rights. As Ryan pointed out, this is one of Ethereum’s strongest competitive advantages.

![Members of the Ethereum community quarreled with each other: Will Lido pose a risk to the Ethereum ecosystem?

My personal opinion is that it would be extremely irresponsible for Lido to gain a dominant market share without significantly improving its resilience to long-tail risks and reducing the impact of these tail risks on the Ethereum protocol. Most, if not all, Lido contributors I’ve spoken to deeply agree with this sentiment.

To be truly aligned with Ethereum, the Lido protocol needs to be as close as possible to the power and stability of Ethereum itself. This is why moves like dual governance, thoughtfully expanding the set of node operators, and allowing permissionless verification (via staking routers) are so important.

Still, Ryan’s concerns about possible reputational damage are largely based on the premise that Lido is viewed as a single entity. I think it’s important to reiterate here that Lido is not a single entity, it is a layer that coordinates among many stakers and node operators.

Explaining this problem to existing institutions is not an impossible challenge, especially in a world where LDO governance power is both minimized (through progressive protocol rigidity) and limited by stETH holders (through veto power). In fact, I think it would be easier than explaining to them why the few Ethereum applications that achieved product-market fit ended up being suppressed by the community. While these concerns are valid, they are still somewhat hypothetical (although the project has addressed these problem roadmap).

In any case, it seems to me that such an outcome would undoubtedly raise serious questions about Ethereum’s ability to be the home of free enterprise and permissionless innovation (values that Ryan and I hold dear).

Ryan: The reason why the Ethereum community is increasingly distrustful of Lido

The core of his argument for self-limitation revolves around the potential reputational damage to ethereum as a result of Lido’s continued growth in market share.

The potential reputational damage is not just cosmetic, it would be a fair and reasonable response to Ethereum’s real weakening in neutrality, compared to an Ethereum without a proof-of-stake system dominated by monopoly LST.

If Lido does not comply with the wishes of a few core developers, researchers, and opinion leaders, threatening to restrict or fork Lido will be the surest way to kill the idea of better and safer property rights.

I totally agree 100% that a “social cut” on Lido (or similar) would pre-destroy our credible neutrality. I’m not sure to what degree of dominance I might support a social cut to the Lido. Perhaps I will never support it, or may support it as Lido approaches the critical 2/3 equity threshold.

However, I support the community’s active exploration of EIPs designed to reduce the threat of monopolistic LST or other large proof-of-stake entities.

It would be extremely irresponsible for Lido to gain dominant market share without significantly improving its ability to withstand long-term tail risks. The reason for the community’s hostility to Lido is contained in this sentence. Allow me to try to explain.

The research community generally believes that monopolizing LST (accounting for more than 22%) will inevitably reduce the credible neutrality of Ethereum, and what has nothing to do with this is the design of LST. Ethereum’s goal is to maximize trusted neutrality. therefore,

(1) Lido is the only application that actively and successfully undermines Ethereum’s goal of maximum trusted neutrality;

(2) Lido’s leadership pretends that Lido is not destroying Ethereum, by pretending that Lido can become neutral enough to avoid reducing Ethereum’s trusted neutrality, when in fact Lido cannot.

Reasons (1) and (2) are key drivers of the Ethereum community’s declining trust in Lido’s intentions.