What Lido staking dominance may mean for Ethereum’s future

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Lido DAO token hold­ers have com­menced vot­ing to deter­mine whether the DeFi plat­form should reduce its stak­ing pool. The vote is a fol­low-up to a gov­er­nance pro­pos­al released on June 24.

The vot­ing process results from a month-long delib­er­a­tion over Lido’s stak­ing dom­i­nance and whether it should lim­it itself to curb poten­tial cen­tral­iza­tion risks.

Lido cur­rent­ly holds 31% of all staked Ether on the Ethereum proof-of-stake blockchain, the Bea­con chain. The stak­ing dom­i­nance has raised fears with­in the Ethereum com­mu­ni­ty, and crit­ics fear it will threat­en Ethereum’s decentralization.

The vote is expect­ed to end on July 1, and the result will deter­mine whether Lido will self-lim­it or not. Should the major­i­ty of vot­ers vote in favor, anoth­er vote will take place on how the self-lim­it­ing process should work.

Concerns over stETH dominance

In the gov­er­nance pro­pos­al, Lido stat­ed that its stak­ing dom­i­nance would give it more vot­ing pow­er once the Bea­con chain goes live. As a plat­form that start­ed to counter cen­tral­ized exchanges, it argued that such cen­tral­ized vot­ing pow­er pos­es an exis­ten­tial threat to the blockchain.

The Ethereum com­mu­ni­ty has raised sim­i­lar fears about the cen­tral­iza­tion of vot­ing pow­ers. The DeFi plat­form cur­rent­ly has around one-third of all staked Ether, which could give vot­ing lever­age once the tran­si­tion to the Bea­con chain is complete.

Vita­lik Buterin, the Ethereum co-founder, has argued that no sin­gle pro­to­col should have a major­i­ty in stak­ing ETH. He opined that such dom­i­nance, com­bined with Lido’s gov­er­nance struc­ture, is poten­tial­ly a dan­ger­ous point of centralization.

Fur­ther, it stat­ed the propo­si­tion is premised on the belief that oth­er liq­uid stak­ing pro­to­cols would also lim­it their expo­sure. This would effec­tive­ly allow small­er pro­to­cols to meet the sup­ply shortfall.

What Lido stak­ing dom­i­nance means for ETH2.0

Ethereum’s tran­si­tion to a PoS blockchain means it will rely on val­ida­tors to val­i­date trans­ac­tions on the blockchain. Unlike a PoW blockchain that requires min­ers to expend excess ener­gy to solve com­plex math­e­mat­i­cal problems.

How­ev­er, to oper­ate a val­ida­tor node, a user must deposit 32 ETH, which is a long shot for many users. Lido, on the oth­er hand, as a stak­ing ser­vice provider, allows users to bypass this require­ment and earn stak­ing rewards.

Accord­ing to data from Ether­scan, rough­ly 12.6 mil­lion ETH is staked in the ETH2.0, which amounts to 10.6% of the cir­cu­lat­ing sup­ply of ETH. Of the 12.6 mil­lion ETH staked, approx­i­mate­ly 4.2 mil­lion have been staked through Lido by 73,369 stak­ers, mak­ing Lido the most used stak­ing pool on Ethereum.

This means, should Ethereum tran­si­tion to its PoS blockchain with Lido still hav­ing the lion’s share of the stak­ing dom­i­nance, it would give the DeFi plat­form exces­sive influ­ence over trans­ac­tion ver­i­fi­ca­tion which many warn could pose a risk. Some con­cerns include val­ida­tor slash­ing, gov­er­nance attacks, and smart con­tract exploits.

On the oth­er hand, Lido’s stak­ing dom­i­nance could help pre­vent a takeover by a cen­tral­ized exchange and ensure the blockchain remains decentralized.

stETH remains depegged

The staked Ether, which is sup­posed to be pegged to ETH, remains depegged after a wave of mas­sive sell-offs. Spec­u­la­tions have pro­fused about the secu­ri­ty of the token and whether its depeg­ging could spell more chaos for the cryp­to ecosystem.

On June 16, Alame­da Cap­i­tal, one of the largest hold­ers of stETH, dumped its stETH hold­ings, a mas­sive $57 mil­lion. This is cou­pled with the con­tin­ued finan­cial trou­bles of Cel­sius and Three Arrows Cap­i­tal, both large hold­ers of stETH.

As of the time of press, stETH has not gained par­i­ty with ETH and is trad­ing at $1,173.

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