Original | Odaily

Author | Azuma

On September 15, 2022, Ethereum completed the transition from PoW to PoS through "merge" consensus mechanism.

Nearly a year later, the total number of ETH staking on the entire network has exceeded 26.4 million, and the staking ratio has reached nearly 22%. "Staking service" as a relatively clear value cycle track, the hidden market value of billions of dollars behind it has become increasingly clear.

After nearly a year of "battle", the staking track has formed a relatively stable pattern for a long period of time. Lido has gradually established its leading position in the track with its liquidity and composability advantages. As of the time of writing, Lido's market share in the staking track is about 32.43%. Looking at the development of the track in the past year, hardly any other staking service provider can match it.

 Odaily Note: The light blue area at the bottom of the picture represents Lido, and the only "entity" that is relatively close to its market share is the group of unconfirmed stakers.

However, while Lido's position in the staking market is becoming more stable, an unexpected "political" crisis is quietly brewing. The core issue of this crisis focuses on whether Lido's dominant position in the staking market violates the decentralized vision of Ethereum, thus hindering Ethereum's long-term and healthy development.

Within the community, there are two opposing views on this matter. Those who support Lido believe that Lido is actually a coordinated protocol among multiple participants, and considering it as a single entity is simply ridiculous. However, the opposition believes that a staking protocol that is almost in a monopolistic position will inevitably harm the credibility of the Ethereum network and even attract extra regulatory attention to the entire Ethereum ecosystem.

Recently, with the concentrated outbreak of two incidents, discussions about this issue have intensified.

Incident One: Self-restraint within the industry

The first incident is actually somewhat funny.

Recently, five staking service providers, including Rocket Pool, StakeWise, Stader Labs, Diva Stake, and Puffer Finance, jointly signed a proposal initiated by Ethereum core developer Superphiz in May this year. The commitment is to ensure the decentralization of the Ethereum network and recommend that all staking service providers abide by a self-restraint rule, which is not to hold more than 22% of the Ethereum staking market share.

This "joint declaration" is clearly targeting Lido.

As of the time of writing, Rocket Pool has the highest market share among these five service providers, accounting for only 3.1%, and StakeWise, ranked second, has dropped to 0.3%... Obviously, a 22% market share is a long-term goal that is probably unattainable for these five service providers. Therefore, signing the commitment at present will not have any impact on their current operations.

However, for Lido, whose market share has already exceeded 32%, signing this so-called industry self-statement commitment means that it must immediately give up 10% of its market share, which is equivalent to forcing Lido to give up nearly 1/3 of its operational and revenue scale accumulated over time.

To give a not-so-appropriate example, this is like the Chinese team making a promise to temporarily not win the World Cup together with Brazil and Argentina... From Lido's perspective, it naturally would not agree to sign this so-called joint commitment. In June of this year, the Lido community has already conducted a governance vote on Superphiz's proposal, and the opposition rate reached as high as 99.81%.

Overall, this industry joint commitment initiated by Superphiz and promoted by five staking service providers including Rocket Pool will not have a direct impact on Lido, because this commitment does not impose any mandatory constraints on Lido's self-operation. At most, it will only have some "annoying" effect.

However, from the perspective of indirect influence, this "show" will inevitably have a certain negative impact on Lido's reputation. Therefore, if one does not fully understand the whole situation, users may easily have the following idea—when facing this commitment dressed in "political correctness," Lido has taken an approach that is completely opposite to the "collective," which seems to be evading decentralized responsibility.

Event 2: Upper consciousness interference

Compared to the former, the second matter is even more dangerous for Lido.

The ignition player of the event is Vitalik Buterin, co-founder of Ethereum. In a recent Discord discussion about Reflexer Finance (RAI), Vitalik mentioned that RAI can support non-popular liquidity staking tokens (other LSD tokens besides stETH) as collateral. He believes that the rise of RAI can solve Lido's current "monopoly" staking market.

As a spiritual father figure in the Ethereum community, it is not surprising that Vitalik holds such an attitude towards Lido's "monopoly" issue. From the perspective of the overall robustness of the ecosystem, Lido's large market size also means a larger single point of risk. Therefore, compared to being "the only one on the stage", Vitalik would lean towards the idea of "letting a hundred flowers bloom".

Earlier, Vitalik also mentioned a proposal similar to Superphiz's, suggesting that all staking service providers limit their market size to below 15%. This number is even more stringent than the 22% proposed by Superphiz.

Considering Vitalik's transcendent position within the Ethereum community, his attitude largely represents the upper consciousness of the entire Ethereum community. And by personally lending a hand to RAI, he has pointed out a potential path of "influencing the supply and demand of underlying LSD tokens through upper-layer application design".

Compared to the "empty promises" of self-restraint, this subtle action has a greater potential impact on Lido. Although the current supply of RAI is still limited, if its scale expands in the future, and even more upper-layer applications start deliberately avoiding stETH under the same banner, Lido's market share will inevitably face the possibility of reduction as demand relative diminishes.

In response to this, Lido quickly provided a response. According to the content of the Lido DAO governance forum,This June, a project called Let's Get HAI (HAI) submitted a funding application on the forum, seeking a budget to cover the audit fees of a third-party security company.

HAI system Optimism on the RAI fork project, its biggest difference from RAI is the intentional support for stETH, belonging to the Lido faction. Before this incident occurred, although Lido had agreed to provide $63,000 in funding for HAI, they had not made the payment for half a month after HAI announced the receiving address. The day after Vitalik's statement, Lido immediately paid the $63,000 to HAI, which can also be seen as Lido's retaliation against this incident.

If Lido wants to escape this crisis, what should it do?

Based on recent developments, one potential direction Lido could choose is to explore more development opportunities outside of Ethereum.

On September 5th, the Lido Solana team proposed seeking $1.5 million in financial support from Lido DAO.

However, I personally don't believe this is a viable solution for two main reasons.

First, in a bear market environment, external ecosystems are unlikely to provide value feedback similar to Ethereum. Lido had previously deployed to Polkadot and Kusama, but eventually chose to shut down due to suboptimal operations. The Lido Solana team also mentioned that if they don't receive financial support, they will consider shutting down the services on Solana.

Second, even if Lido finds high-quality external development opportunities, Ethereum ecosystem will still be the main battlefield for Lido's operations and income in the short term. Expanding externally cannot effectively address internal conflicts. To address the upper-level consciousness pressure and the joint impact within the Ethereum ecosystem, Lido still needs to find solutions from within.

Staking itself is not a market with very distinct service differentiations. In other words, compared to similar competitive services, Lido does not have particularly advantageous business models, and its yield situation is not superior. The main reason why it has accumulated over 32% market share today is mainly attributed to the liquidity and composability advantages built by Lido through long-term stable operations.

The staking ratio of the entire Ethereum network has approached 22%, and this rate is not slow, but it also indicates potential risks.

Means there is still 78% market space. With the amplification of the value of the collateralized lending and borrowing (LSDFi) itself, the upper layer application track based on various LSD tokens and services is also developing rapidly, and a new market competition is unfolding. Whoever can obtain more application scenarios in the new competition will face greater market demand, thereby consolidating or even expanding their market size. As for Lido itself, it can learn from MakerDAO's development strategy. Stablecoins are also a market with no distinct service differentiation. In order to increase the market demand for DAI, MakerDAO is working on increasing the yield of DAI while expanding its utility through Spark Protocol.

To imitate the cat's drawing of a tiger, Lido can not only amplify profit opportunities for stETH through financial tools like Curve, but also build its own upper-layer application ecosystem through direct or indirect means (such as supporting HAI), which might be an effective strategy to withstand internal pressures and impacts within the Ethereum ecosystem.