The Lido Situation Introduction 1 Problem 2 Description 2 Data about the problem 3 Why it’s a problem 4 Solutions 6 Education 6 About the risk related to using Lido 6 Ongoing work 7 Incentives 7 Economic incentives / vampire attack 7 Holding rETH long term 8 TODO 8 Leverage layer 0 8 Chokepoint 3.0: Push DAOs and big players to favor alternatives 8 Push for easier solo staking 9 TODO 9 Push alternatives 9 Solo staking 9 Rocket Pool 9 Stakewise 9 Swell 9 Ankr 10 Stader 10 Communication 11 Conclusion 12 Thanks 13 Introduction Lido, the liquid staking protocol, currently controls more than 32% of validators on the Ethereum network. Despite having started as a useful and beneficial service, it has grown to become one of the largest centralization vectors within the Ethereum ecosystem. According to Vitalik Buterin, stake pool providers should start limiting themselves at 15% market share: (source) Today, Lido already controls more than twice this limit. This document aims at describing this situation, explaining why it’s a problem, and providing potential solutions. More importantly, it aims at sparkling a layer 0 movement in order to make sure that this centralization vector remains under control. Most of the content in this document hasn’t been created by yours truly, it’s a collection of what’s been said by others on the subject. Feel free to make comments, suggestions, and contributions. Any help is much appreciated AND NEEDED. The Lido Situation - Ethical-trade 1 Problem Description It’s good to start by noting that Lido isn’t a bad actor It’s rather a good actor that has grown too big, taking advantage of being early to market and providing a useful service. While Lido controls a vast proportion of the Ethereum staking market, it has decided to not self-limit: Lido’s vote on self-limiting The Lido Situation - Ethical-trade 2 As a consequence, the only way for Lido’s growth to be limited in order to preserve decentralization is through external factors that this document aims at exploring. Data about the problem - A total of 19 million eth is staked on Ethereum. A total of 6 million eth is staked on Lido. More than 36% of all staked eth is staked with Lido - More than 32% of all validators are using Lido. - Lido is the #1 protocol on Ethereum with a TVL of more than $13 billion. That's more than twice the TVL of the second largest project, Maker. That's close to 6% of all ether in existence. - The activation of withdrawals by Lido 2 weeks ago had almost no effect of their TVL. Over the past month, Lido's TVL still grew by 10.8%. There isn't any reason to expect their share to drop significantly in the future. Eth staked with Lido (“unidentified” not displayed) The Lido Situation - Ethical-trade 3 Lido’s TVL denominated in eth Why it’s a problem In short, a decentralized, credibly neutral blockchain cannot have a centralized actor controlling a significant proportion of its consensus layer. So how much is too much? “The network only needs 66% participation to finalize, why is 22% important? If each entity is limited to 22% of the validators on the beacon chain, it takes more than three entities in collusion to finalize the chain with inaccurate data. At the same time, 22% control is still viable as any one entity could go down without threatening finality of the chain. One threshold percentage had to be chosen to simplify this catalog's scope and prevent varied (and unfair) thresholds across staking entities. 22% is becoming a popular threshold in the community as it represents a middle ground between the entirely new set of dangers >33% control brings while still not going too low to discourage staking entity commitment all together. What happens at 33%? If any entity controls 33% of the network they can disrupt the network by preventing finalization since 66% of validators need to agree on the chain for finalization. It's easy to assume that this would be a malicious attack, but there are plenty of scenarios where a well-meaning entity with 33% could be forced to go offline against their will - consider something like a ransomware attack that cripples one entity for a prolonged period.” (Credit Bob Rossi and their Github) The Lido Situation - Ethical-trade 4 (source) Lido now controls more than 32% of validators The Lido Situation - Ethical-trade 5 Solutions Education About the risk related to using Lido “It is surprising how many people in this thread don't consider the risk/reward on the additional APR from Lido staking. Let's say you invest $10,000, here's the difference in rewards: Validator Yield = 4% $10k invested Lido fee = 10% Rocketpool fee = 14% Flat yield = $400/year With Lido = $360/year With Rocketpool = $344/year Diff = $16 / year You'll make an additional $16/year with Lido. Now what are the risks? Rocketpool validators are fully insured with RPL, if any validators get slashed, confiscated, hacked etc you don't lose anything. There are 2600+ nodes which makes it highly unlikely there will be correlated bad events. With Lido there are only 30 companies running the validators. Any one of those companies could have an accidental mass slashing, a hostile government forcing them offline, losing access to their private keys etc. If they do then the network and stETH could lose 3 - 5% of its value overnight, not to mention the drop in stETH value if people flee it after realizing the possible tail risks it has. This kind of tail risk doesn't seem worth it for an additional 0.16% yearly rewards.” (Credit: educatemybrain) Todo: Need to spread this message The Lido Situation - Ethical-trade 6 Ongoing work - https://ethsunshine.com/ - https://stateofeth.com/ These initiatives are led by Hanniabu who is currently building a successor, he needs: - A list of the risks for what can go wrong with a single staking entity having an overwhelming share of the market and at what point (marketshare) each of these become active risks - A list of guides (or tools) for migrating away from Lido to other LSTs using various methods (using a dex or LST site, different layers) Incentives Economic incentives / vampire attack “We would create a contract or custom range liquidity pool where we would deposit rETH (say 100 rETH) and set the exchange rate to be exactly what the going exchange rate is for rocketpool (0 premium) for people to swap their stETH either in the pool or through a custom contract with an oracle on the conversion rate. We would incentivize any user to switch over by giving them 0 premium and then also putting up “prizes” ourselves, limited edition nfts, EVMs, as well as engaging other communities like rocketpool and others to “donate” prizes like Rpl bounties and other aligned communities to create essentially a pot for anyone that switches over to be eligible to win a prize. The idea would be to get all the rETH we provide switched to stETH then we ourselves would go and unstake from Lido, redeposit the eth into rocketpool, and then rinse repeat as many times as necessary, once again provide rETH liquidity so that more people can switch over and win prizes.in my mind if this takes off we could easily migrate over 1000 eth into rocketpool protocol and away from lido. This would essentially be an economically incentivized and community driven vampire attack. It would need to be an all out marketing campaign and we would be sweetening the pot with “sweepstakes” essentially. The Lido Situation - Ethical-trade 7 I think it has real possibilities of succeeding if we can get vocal leaders around the community to help champion it and if we can get donations also. But from our preliminary talks so far, it looks like we’d be willing to lead that charge if we can solidify the concept and feasibility.” (Credit: etheraider) Holding rETH long term “I wonder if we can run some incentive program where if you convert from stETH or wstETH to rETH, then you will earn a reward if you hold rETH for more than a year. Where could this reward come from? Possibly get some projects that support stETH/wstETH to commit protocol/LP fees from those tokens? Maybe Rocket Pool can devote some funding. Maybe the EF would participate (I wonder how bad things have to get for them to be willing to take part in something like this)?” (Credit: Hanniabu) TODO - Solidify the concept and feasibility - Find “sponsors” and funds - Get vocal leaders involved Leverage layer 0 Chokepoint 3.0: Push DAOs and big players to favor alternatives “Make sure treasuries allocate responsibly. A GnosisDAO vote to diversify LST's failed yesterday (GIP-86), but that's exactly where the community effort should be. Specifically we should be holding Karpatkey accountable. They are responsible for treasury management and evidently don't see Lido dominance as an issue. Karpatkey also manages Balancer, ENS and CoW treasuries. The Lido Situation - Ethical-trade 8 Making them understand will make a big difference. There's a current Aragon DAO proposal to stake 57k ETH with Lido. This is similar to client diversity; although admirable it wasn't home stakers who ultimately made the difference, rather it was CEXs...we have to go after the big players and get them onboard. Even just educating HNWI's like Justin Sun (who has at least 150k ETH staked with Lido) would make a tangible difference.” (Credit: Etherenum) This already worked: “We managed to stop Lido from getting incentives from Optimism, so considering how many DAOs EthFinancers are represented in I reckon using our influence to tilt the scales a bit is definitely possible.” (Credit: MinimalGravitas) Push for easier solo staking https://eth-docker.net/Usage/QuickStart https://docs.gnosischain.com/assets/images/eth-docker-step1-39843bedd6f5f68c739eeef2ad342c78 .png TODO List all major DAOs and actors who allocate to Lido and coordinate with the community to push for alternatives. Don’t push alone, let’s do it all at once. Push alternatives Solo staking Best alternative Rocket Pool Website Easiest decentralized alternative The Lido Situation - Ethical-trade 9 Stakewise Website Recent addition to the liquid staking market Swell Website Recent addition to the liquid staking market Ankr Website Stader Website The Lido Situation - Ethical-trade 10 Communication In order to coordinate and push for change simultaneously, it would be beneficial to gather all conversations related to solving this problem in a single channel. Feel free to add comments on where this should happen. People willing to contribute need to signal their willingness to help. The Lido Situation - Ethical-trade 11 Conclusion As mentioned at the beginning, Lido isn’t a bad actor but it has become too big. This problem won’t solve itself. It has to become a community effort, a layer zero initiative and all the help is welcomed. The Lido Situation - Ethical-trade 12 The Lido Situation - Ethical-trade 13 Thanks In no particular order, except for the first: Hanniabu Etherenum MinimalGravitas Educatemybrain etheraider The Lido Situation - Ethical-trade 14