Members of the Ethereum community: Will Lido pose a risk to the Ethereum ecosystem?
Original translation: Kaori, BlockBeats
Last week, Ethereum Layer 2 solution providers, including RocketPool, StakeWise, and Stader Labs, committed to keeping the validator stake below 22%. However, the market leader Lido Finance, with a stake of up to 32%, did not make any statement on this matter. This raised concerns about whether Lido poses a risk to the Ethereum ecosystem.
Ethereum community member Ryan Berckmans (@ryanberckmans) believes that the risk of Lido's unlimited dominance is that it may lead to Ethereum being seen as controllable by big companies and governments, or even more centralized than other blockchains. If this is the case, it could significantly impact the development speed of Ethereum, limiting its benefits to humanity and reducing the value of ETH.
Lido ecosystem contributor sacha (@sachayve) published an article refuting many of Ryan's concerns, arguing that Ryan's worries stem from viewing Lido as a single entity, when in reality, Lido is a coordinating layer among multiple participants. Explaining to institutions that Lido is not a single entity is not difficult, especially when LDO governance power is greatly weakened and subject to restrictions from stETH holders.
In response to sacha's rebuttal, Ryan published a second article arguing that a monopolistic Layer 2 solution with a high stake (22%+) would inevitably reduce Ethereum's credibility and neutrality, regardless of its design. However, the Lido team chooses to ignore this and refuses to take the most direct approach (self-imposed limitations) to restore Ethereum's neutrality. This is the main reason why the Ethereum community is increasingly losing trust in Lido.
BlockBeats summarizes their arguments as follows.
Ryan: Lido's Unlimited Dominance is the Only Significant and Persistent Risk Between Ethereum and Global Adoption
In my view, the worst-case scenario for Lido's unlimited dominance is not network interruptions, but establishing a reputation among enterprises and governments that Ethereum is "controlled" or "not as decentralized as other chains".
If this were to happen, it could impact the growth rate of Ethereum by magnitudes, subsequently affecting the interests of Ethereum and the long-term valuation of ETH by a small fraction.
Ethereum is a chain with very low tps, but it has the "so far" most secure block space. This reputation is crucial for the future of the L1 and L2 ecosystems.
Our valuation of ETH is based on governments anchoring their sovereign bond systems on Ethereum's low-data, high-cost chain and bridging it to many L2s and L3s. Compared to anchoring it on a higher tps chain, the latter clearly carries higher risks and inferior long-term ownership, while the former is clearly more favorable.
Ethereum is heading towards becoming a global settlement layer, but this success depends on our reputation in the enterprise and government sectors. Given this path dependence, the threat of Lido's dominance poses a risk to our reputation. This is different from the comparison with Google's monopoly on search, as Google did not "threaten" the internet in the same way, resulting in a much smaller impact on the internet.
Currently, Lido's unlimited dominance is the only known substantial risk that could reduce Ethereum's value to only 1.2 to 3 trillion dollars in ten to fifteen years, as opposed to 12 to 30 trillion dollars. That's why we cannot tolerate Lido's unlimited dominance - it is actually the only serious and persistent risk between Ethereum and global adoption.
Our mission is to create a fair competitive environment for all humanity. To achieve this goal, we are willing to tolerate social friction and encourage Lido to strive for a 22% market share through fluctuating protocol fees.
sacha: Why Ryan's Concerns about Lido's Growth Impacting Ethereum's Reputation are Misplaced
While Ryan acknowledges that the "worst realistic scenario of Lido's unlimited dominance is not the breakage of the network," his core argument for self-restraint relates to the potential reputation damage Ethereum could suffer if Lido's market share continues to grow. Specifically, he is concerned that this could affect Ethereum's growth, which in turn could limit its adoption ("benefits to humanity") and market value (the number of zeros behind the long-term ETH valuation").
In his view, the key distinction of Ethereum compared to other higher TPS chains is that it provides users with better and more secure long-term property rights.
Of course, the counterargument here is that if Lido doesn't comply with the wishes of a minority of core developers, researchers, and influencers and threatens to restrict or fork Ethereum, this is the most reliable way to kill any notion of better and more secure property rights. As Ryan points out, it is one of Ethereum's strongest competitive advantages.
My personal opinion is that obtaining dominant market share for Lido before significantly improving its ability to resist tail risks and reducing the impact of these tail risks on the Ethereum protocol would be extremely irresponsible. Most (if not all) Lido contributors I have communicated with deeply agree with this viewpoint.
To truly align with Ethereum, the Lido protocol needs to align as closely as possible with Ethereum's own strength and stability. That's why measures such as dual governance, thoughtful expansion of the node operator set, and permissionless validation (via the Staking Router) are crucial.
Nevertheless, Ryan's concerns about reputation damage are largely based on the premise of viewing Lido as a single entity. I believe it is necessary to reiterate here that Lido is not a single entity; it is a layer that coordinates numerous stakers and node operators.
Explaining this issue to existing institutions is not an impossible challenge, especially in a world where LDO governance power is minimized (through gradual protocol ossification) and restricted by stETH holders (through veto power). In fact, I believe this is much easier than explaining why a few Ethereum applications that achieve product-market fit are eventually suppressed by the community, although these concerns are valid and still somewhat speculative (although the project has a roadmap to address these issues).
Either way, it seems to me that such a result would undoubtedly raise significant doubts about Ethereum's ability as a home for free enterprise and permissionless innovation (values that Ryan and I hold dear).
Ryan: Reasons for the Ethereum community's growing distrust of Lido
The core of his argument about self-restraint revolves around the reputation damage that Ethereum may suffer due to the continued growth of Lido's market share.
The potential reputation damage is not just a superficial issue; it would be a fair and reasonable response to weaken Ethereum's neutrality compared to an Ethereum without a proof-of-stake system monopolized by LST.
If Lido does not comply with the will of a minority of core developers, researchers, and opinion leaders and threatens to restrict or fork Lido, it would be the exact way to kill better and safer property concepts.
I fully 100% agree that "social haircut" on Lido (or similar institutions) would pre-emptively damage our trusted neutrality. I am unsure to what extent I may support a social haircut on Lido. Perhaps I will never support it, or maybe I would support it when Lido approaches the critical 2/3 threshold of ownership.
However, I support the community actively exploring EIPs aimed at reducing the threat of monopolistic LST or other large proof-of-stake entities.
It would be extremely irresponsible if Lido were to gain dominant market share without significantly improving its ability to withstand long-term tail risks. The community's hostility towards Lido stems from this reason. Allow me to explain.
The research community generally believes that a monopolistic LST (representing more than 22% of the total) inevitably weakens Ethereum's trusted neutrality, regardless of LST's design. Ethereum's goal is to maximize trusted neutrality. Therefore,
( 1) Lido is the only application that actively and successfully undermines Ethereum's maximum trust neutrality objective;
( 2) Lido's leadership pretends that Lido has not undermined Ethereum by pretending that Lido can become neutral enough to avoid compromising Ethereum's trust neutrality, but in reality, Lido cannot achieve that.
Reasons (1) and (2) are key driving factors behind the Ethereum community's loss of trust in Lido's intentions.
