The Lido Liquid Staking Controversy: Examining Governance and Control

2023-10-10, 03:39

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Keywords: Liquid staking, Lido protocol, proof-of-stake protocol, <a href="/th/price/ethereum-eth" target="_blank" class="blog_inner_link">Ethereum</a> blockchain, staked ETH, liquid staking token (LST), staking derivative token, Lido governance, ETH liquid staking, Lido dominance in ETH liquid staking, Lido’s centralization, delegating ETH 
## Introduction 
Liquid staking is one of the most profitable crypto investments involving Ethereum and other tokens based on protocols that [use the proof-of-staking consensus mechanism](https://www.gate.io/learn/articles/what-is-proof-of-stake/60 "use the proof-of-staking consensus mechanism"). One striking issue relating to liquid staking is the existence of a shadow token that can generate additional rewards for the investor.

In this article, we explore how liquid staking works on the Lido protocol. We will also discuss the current controversy surrounding the Lido staking platform.

Read also: [What Is Leased Proof of Stake (LPoS)](https://www.gate.io/learn/articles/what-is-leased-proof-of-stake-and-how-does-it-work/374 "What Is Leased Proof of Stake (LPoS)") and <a href="/th/price/safepal-sfp" target="_blank" class="blog_inner_link">SafePal crypto</a>?")
## Liquid Staking
Let’s take time to understand what liquid staking is before we concentrate on its specific aspects. Liquid staking is a crypto investment solution that enables users to access liquidity for the cryptocurrencies they have staked. More to this, the investors earn additional reward for staking a coin such as ETH.

Liquid staking overcomes the key problem which investors in [proof-of-stake](https://www.gate.io/learn/articles/what-is-pos-staking/10 "proof-of-stake") protocols used to face. The investors that used to contribute their coins to secure a network like Ethereum were unable to use their staked coins.

In the past, the nodes that validated transactions on the Ethereum blockchain would stake their ETH for indefinite periods. That meant it was not possible for them to use the staked coins. For instance, they could not use the staked ETH as collateral when they wanted to get DeFi loans.

Liquid staking solves this problem. This is because the investor gets a token that represents the staked ETH which he/she can use for other purposes like yield farming.

The investor can use the liquid staking token (LST) in several ways. For instance, he/she can trade it on crypto exchanges which creates another income stream. Again, the investor can transfer the LST to other platforms or spend it without affecting his/her staked ETH.

Nonetheless, it is important to note that the investor would need to return the LST to the staking [platform like Lido](https://www.gate.io/learn/articles/what-is-lido/171 "platform like Lido") to claim his/her staked ETH. When you [stake ETH on Lido you get stETH](https://www.gate.io/how-to-buy/lido-staked-ether-steth "stake ETH on Lido you get stETH"), its liquid staking token, which has the same value as ETH. 
## What is Lido? 
Lido is a liquid staking protocol that provides its staking services for several blockchains including Ethereum. The platform enables its users to stake their protocol tokens without locking them.

Nonetheless, [Lido](https://www.gate.io/how-to-buy/lido-dao-ldo "Lido") is well-known for enabling Ethereum investors to stake their ETH and get its liquid staking derivative token (LST) [called stETH](https://www.gate.io/price/lido-staked-ether-steth "called stETH"). Lido then delegates the staked ETH to different node operators [who verify transactions on the Ethereum network](https://www.gate.io/blog_detail/2905/a-comprehensive-guide-on-verifying-ethereum-transactions "who verify transactions on the Ethereum network").

The ETH investors can use their stETH for other purposes like lending. One of the major advantages of Lido is that it allows investors with less than 32 ETH to stake them and earn a share of the Ethereum block rewards.

More significantly, Lido uses a self-custodial system for the protocol tokens like ETH. This means that the staked tokens remain under the custodian of the investor at all times. From the time the investor stakes the token to the time it is allocated to a validator it remains under his/her ownership. 
## Lido Governance 
Currently, Lido uses the same governance structure as many decentralized autonomous organizations (DAOs) where the protocol token holders have the right to contribute to its decision making process.

In this case, the holders of Lido’s native governance token, LDO, participate in decision making through its voting mechanism. Interestingly, Lido uses a token-weighted voting system, meaning that an investor who holds many LDO tokens has much more voting power than someone with fewer tokens. The LDO holders vote on-chain for the given proposals.

However, there is a proposal to amend the Lido governance system. The community proposes to introduce a dual governance system where both LDO and stETH holders will have the right to veto on given proposals. This will ensure that the interests of the stETH investors are protected at all times.
## Lido Maintains much Control over Liquid Staking  
Some analysts have pointed out that Lido controls much of the ETH liquid staking.  Specifically, Lido controls more than 33% of the staked ETH, something which a certain quarter of the ETH market is not happy about.

With about a third of the staked ETH under Lido’s control some critics believe that the ethereum network is under threat. They are calling on other liquid staking platforms to find ways of increasing their staked ETH. 
## Concerns and Criticism about Lido’s Dominance in ETH Liquid Staking 
The greatest criticism about Lido’s dominance in ETH liquid staking is that it creates centralization. This may negatively affect the security of the Ethereum blockchain if something bad happens to Lido.

Some analysts have argued that Lido’s dominance may lead to external manipulation of the Ethereum network which can destabilize its stability. Network manipulation may affect Ethereum’s off-chain network governance system as well.

The second concern regarding Lido dominance in [ETH staking](https://www.gate.io/blog_detail/3103/analyzing-eth-price-impact-eth-staking "ETH staking") is that the security of the Ethereum network comes under threat if the protocol is hacked and most, if not all, the staked ETH is stolen.

Similarly, the concentration of staked ETH under Lido ultimately undercuts the Ethereum blockchain’s decentralized nature. Evan Van Ness, an Ethereum developer, criticized Lido’s dominance on X (formerly Twitter). He wrote, "Lido may be the biggest attack on Ethereum's decentralization in our entire history."

Despite having many decentralized autonomous organizations under it Lido may centralize how they operate and govern themselves. There is also a possibility of collusion among the node operators. Thus, they can have a great influence on the finality of Ethereum blocks.

The other problem may arise if Lido faces a threat from strong governments like the United States one. Such a threat may force Lido to censor some activities to avoid criminal charges from the government. For example, it may block stETH transactions of certain digital wallets like the ones which are sanctioned by the Federal government.

Related articles:
[What Is Cryptocurrency Staking?](https://www.gate.io/blog_detail/328/what-is-cryptocurrency-staking "What Is Cryptocurrency Staking?")
[How Does Crypto Staking Work?](https://www.gate.io/blog_detail/1826/how-does-crypto-staking-work "How Does Crypto Staking Work?")
## Arguments against the Centralization Theory 
Whereas the issue of centralization may appear very logical there are strong arguments against it. First, Lido has many node operators as well as staking modules which makes it impossible for all of them to collude and manipulate the Ethereum network.

Also, although Lido develops and secures the staking platform it cannot influence the node operators to do something which may threaten the ethereum network. This is because the node operators can never blindly follow the dictates of Lido as they risk losing their block rewards.

They are afraid of slashing, a penalty for validators who misbehave. Basically, they may lose their staked ETH if they go against the requirements of the Ethereum network. For instance, if they hurt the network or hinder transaction finality they will lose portions of their staked ETH as well as the expected income.

In fact, Lido’s real objective is to decentralize the network. It creates a balance in the Ethereum ecosystem by incorporating many node operators in the validation system.

Many people like Lido because it enables individuals to participate in the staking process which has prevented a few ETH whale investors from securing the network. Notably, Lido has not concentrated ETH in a few node operators which has further decentralized the Ethereum validation system.

Other critics have pointed out that the individuals who are attacking Lido for creating centralization are doing that as a marketing gimmick to promote their own liquid staking platforms. As a fact, Lido is working on increasing the number of node operators to 5,000 which will discourage anti-competitive behavior among them. 
## How Lido’s Controversy May Affect the Broader Liquid Staking System?
In light of the perceived effects of Lido’s centralization other Ethereum liquid staking platforms are working hard to reduce its dominance. Puffer Finance, StakeWise, Stader Labs, <a href="/th/price/rocket-pool-rpl" target="_blank" class="blog_inner_link">Rocket Pool</a> and Diva Staking, the other leading liquid staking platforms have promised to increase their market share in order to reduce Lido’s dominance.

Many experts believe that coordination [in the liquid staking sector](https://www.gate.io/price/view/liquid-staking-tokens "in the liquid staking sector") is more important than competition. This is because polarization in delegating ETH for validation purposes may create threats for the entire validation system.

Already, the other liquid staking protocols have set themselves a self-limit of 22% of the staked ETH. However, Lido has disagreed with this and goes for dominance. This may force the other platforms to increase the volume of their staked ETH to counter Lido’s move. 
## Conclusion
Lido liquid staking platform has increased its dominance as it controls 33% of the currently staked ETH. Nevertheless, the other liquid staking platforms like Puffer Finance, StakeWise, Stader Labs, Rocket Pool and Diva Staking aim to increase their market share. Many blockchain analysts believe that Lido’s dominance in ETH staking is unlikely to pose a serious threat on the Ethereum network.  
## FAQs about Liquid Staking
### Is Lido safe for staking?
Generally, Lido is safe for staking ETH, <a href="/th/price/solana-sol" target="_blank" class="blog_inner_link">Solana</a> and other protocol tokens. The platform has a total value locked of more than $14 billion in crypto assets. It has also undergone several protocol audits to improve its security. However, like any other smart contract based protocol Lido may have bugs in the future.
### How to stake at Gate.io?
Investors can stake their crypto assets at Gate.io through joining its Hold and Earn program. After verifying one’s account, an investor should visit the [Gate.io Hold and Earn Section](https://www.gate.io/hodl "Gate.io Hold and Earn Section") where he/she selects the cryptocurrency to stake. The investor can lock his/her cryptocurrency for a period of between 7 and 90 days.
### Is staking ETH with Lido risky?
[It is safe to stake ETH](https://www.gate.io/learn/articles/how-to-stake-eth/209 "It is safe to stake ETH") with Lido as you can earn a reward for that. When you stake ETH you get Liquid staking tokens (LST) which are equivalent to the amount of your staked ETH. Nevertheless, the protocol may develop bugs which may put the staked ETH at risk.
### What is the percentage of staking at Lido?
Lido offers 3.5% staking rewards for Ethereum. However, the platform also charges a 10% fee on staking rewards which it splits between the node operator and the DAO treasury.
### Is Lido liquid staking?
Lido is a protocol that offers liquid staking services for several protocol tokens or coins. The investor receives its Liquid staking tokens (LSTs) whose value is equivalent to that of the staked token. Therefore, the investor can trade the LSTs or invest them somewhere else.

<div class="blog-details-info">
<div>Author:** Mashell C.**, Gate.io Researcher
<div class="info-tips">\*This article represents only the views of the researcher and does not constitute any investment suggestions.
<div>\*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.
</div>

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