Members of the Ethereum community have long been concerned that Lido's dominant position is the root cause of network centralization, and many people take it for granted that Lido's continued accumulation of market share poses a systemic risk to Ethereum's consensus.Due to less than one-third of ETHs being pledged through Lido, this agreement violates the first of three key consensus thresholds, which may result in a worrying centralization vector as Lido can prevent Ethereum from finalizing without the need to hook up with other verification entities!Ultimately, Lido's market share may exceed 50%
Members of the Ethereum community have long been concerned that Lido's dominant position is the root cause of network centralization, and many people take it for granted that Lido's continued accumulation of market share poses a systemic risk to Ethereum's consensus.
Due to less than one-third of ETHs being pledged through Lido, this agreement violates the first of three key consensus thresholds, which may result in a worrying centralization vector as Lido can prevent Ethereum from finalizing without the need to hook up with other verification entities!
Ultimately, Lido's market share may exceed 50%. At this point, the protocol can review certain transactions and reorder short-term transactions to maximize MEV extraction.
After gaining 66% market share, Lido will control the vast majority of the validator set. This project will be similar to some form of Ethereum governance wrapper, capable of forking the chain and ultimately determining any version it wants, unlocking the ability to double spend and freely review transactions
To wage war on hegemony?
Given the risks of centralization, proposing solutions to limit the uncontrolled growth of Lido has become popular in many Ethereum circles.
Unfortunately, it is almost certain that the window of opportunity for implementing such remedial measures has closed
Although it is possible to impose fundamental conditions at the origin of the pledge, limiting the growth of individual participants beyond a given threshold, today the commercial interests of Lido (as well as other large pledge entities such as Coinbase and Binance) are too deeply ingrained to make these modifications!
Implementing such controls would require a hard fork in Ethereum, but given that LDO holders voted overwhelmingly against self limitation last year, such an upgrade could undermine Ethereum's fragile social consensus and potentially lead to chain fragmentation, which is Vitalik's biggest concern.
Not just revenue
Realizing that the limitations of the basic layer are impossible to implement, some famous Ethereum people have instead advocated for "vampire attacks" by using tokens as incentives to encourage LST holders to divest themselves from large pledge providers (i.e. Lido), thereby increasing pledge returns.
However, returns are only one of the many factors that pledgers must weigh when choosing the optimal pledge plan, and simply increasing returns may not be enough to force pledgers to leave Lido in large numbers.
Projects that use vampire attack methods will gain short-term adoption of mercenary capital. However, once the incentives from an unsustainable inflationary token economy dry up, pledgers will seek to transfer their business elsewhere.
They will once again be forced to reassess the available pledge options on a risk adjusted basis, and due to the inherent winner take all dynamics of the pledge, these depositors are likely to eventually return to Lido!
Lido's STETH holders benefit from the top-notch liquidity of the token and its extensive integration as collateral for the DeFi protocol. These are two important factors that drive people to adopt stETH instead of fiercely competitive LST.
In addition, as a leading LST provider of ETH collateral, Lido can easily resist strong competitors by reducing its fee structure by a percentage while maintaining net profit. It is worth noting that Lido has not yet developed in this direction, but this is the advantage Vanguard took advantage of in the 1980s. With the birth of mutual funds, it expanded the scale of asset management and completely changed the passive investment field.
Although launching a war against Lido may be popular, it is time for the Ethereum community to accept the fact that the basic economics of pledging on Ethereum have promoted the concentration of pledging towards a single provider, and acknowledge that we are fortunate to live in a decentralized player led reality.
In this decentralized reality, Lido is actively seeking to expand its validator set by introducing a pledge router, which will allow anyone from a single pledge to operate nodes in a distributed validator technology (DVT) cluster, and seek to empower its LST holders with the ability to veto governance votes through a dual governance model.
Bad choice
This reality is much better than centralized alternatives, where large CEX (such as Coinbase) control the entire pledge stack (i.e. stored Ethereum and node operations).
In order for Lido to utilize its unlocked centralization vector by exceeding three key consensus thresholds, LDO holders need to collude with node operators whose protocols are constantly expanding. If they comply with non Ethereum consistent instructions, they will face the risk of reputation damage, while the pledge of stETH holders will face the risk of being reduced.
Undoubtedly, Ethereum's pledge architecture creates a suboptimal equilibrium. Nevertheless, if drastic actions are not taken that may undermine the fragile social consensus layer of blockchain, it is already too late to reverse the trend. However, we can at least appreciate the fact that our pledge hegemons are decentralized, and they are trying their best to alleviate existing concerns about centralization.
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