Image by John Woo via License: Creative Commons

The staking pool has accounted for almost a third of all stakes. Although Lido itself is decentralized, for some the very existence of Ethereum is at stake.

Ethereum has a problem. This is something we are currently hearing more and more often directly from the heart of the community. The problem is called Lido and it is a staking pool.

Lido is by far the largest pool. He currently holds around 32.3 percent of all stakes, which is just a little less than a third – and that’s a threshold that many believe no pool should reach because beyond that point some unpleasant things become possible.

Where is Ethereum’s immune system?

At first glance, the situation with Bitcoin doesn’t look any better. Here, too, a pool has more than 30 percent of the hashrate, foundry, and other pools have such high shares that only two to four actors have to come together to form a cartel that holds more than 51 percent.

Bitcoin-Mining-Pools nach

But there is a crucial difference between Bitcoin’s Proof of Work and Ethereum’s Proof of Stake: the miners continue to provide their Proof of Work locally. If they pull the plug, the pool won’t get any hashes. The stakers, on the other hand, leave their stakes to a pool. You can’t just take away the power of the pool like that. What only looks like a threat with Bitcoin is really threatening with Ethereum.

A second difference lies in the attack threshold: While with Bitcoin serious attacks only threaten from a hash rate of 51 percent, with Ethereum problems occur at a third. Because some actions, such as the finalization of blocks, require a two-thirds majority of the stakers – and can be prevented with a third of the stakes.

Ethereum staking pools according to a dashboard at Dune Analytics

“If someone gets more than 33 percent, that’s bad,” says Ethereum developer Danny Ryan in the Web3 Builders interview with Evan van Ness. “If someone takes over and says, ‘shut it down,’ then we have a problem with finality. After that, the network lives on, but you can no longer use it for economic transactions.”

If a party gets above 33 percent in Ethereum, Ryan continues, “and the community doesn’t respond, then we lack the immune system. So it’s very important and crucial.”

That doesn’t sound good. But is Lido even a party?

Lido, a decentralized pool

Lido is not a classic centralized pool. Rather, Lido is a protocol that forms a DAO based on smart contracts.

The brilliant idea of ​​Lido is “liquid staking”: Anyone who deposits Ether with Lido to stake receives a token in return, stETH. The “staked ETH” earns interest with the income from staking. You remain mobile, but are connected to the deposited Ether. You can give the stETH largely risk-free in a liquidity pool with ETH in order to earn further interest. In some eyes, stETH is a better base token for Ethereum than ETH.

The Ether of the stakers in the Lido pool is distributed by the protocol to selected validators to whom the smart contracts assign tasks. There are currently 32 of them.

The holders of the Lido tokens (LDO) form a decentralized entity, a DAO. For example, you decide who gets on the whitelist of permitted validators. Ideally, they ensure that the validators use different clients and hardware and are geographically widely distributed.

This architecture makes Lido lower risk than an exchange such as Coinbase, Kraken or Binance. The DAO cannot force the validators to do anything since they hold the keys and ETH themselves. The validators, in turn, cannot steal the users’ tokens because the payout address is determined by them. However, you can embezzle the income, which would quickly be noticed.

Lido as a defender of Ethereum freedom

Lido sees itself as the least risky choice: as protection against capture by exchanges and other central staking providers.

This self-image became more than clear about a year ago. In early summer 2022, the Lido DAO voted on whether, like other pools, it would limit the maximum share of the total stake to 22 percent. Such a voluntary commitment is intended to protect Ethereum from being taken over by a cartel of staking pools.

The pros and cons of the proposal were discussed around the vote. The argument against a limit is that Lido would like to reserve the option of collecting two thirds of the stakes. Because if one third is enough to attack, you need two thirds to defend.

If a cartel of exchanges reaches more than a third of all stakes, the argument goes, a regulatory regime can force them to halt Ethereum or enforce certain standards, such as KYC, blacklists, etc.

According to his own story, Lido is not the attacker – but the defender.

“No better than staking on a central exchange”

Of course, the Ethereum developers know Lido’s architecture. “I have no problem with Lido as a concept,” says developer Ben Edgington when asked by, “or with liquid staking in general.”

But the problem with Lido is different: the “Governance Theater”. Danny Ryan illustrates it in the video interview with the choice of whether Lido limits itself: The DAO voted against it with 99 percent. But that wouldn’t have been necessary. The three largest holders would have been enough to achieve the necessary majority. “When I look at the last few dozen Lido votes, I can’t find one where 50 percent of the votes weren’t in the hands of two or three individuals,” says Ben. All the discussion and public voting is just a Potemkin Village to make the community feel good.

These three individuals have power not only over Lido – but over Ethereum as a whole. “The DAO is very powerful: it decides who is in the validator set and it can punish operators if they do not follow its rules. The DAO can each Enforce behavior from operators, with harsh consequences for those who refuse.” [Hervorhebung durch Ben]

Even the Lido forum admits: “If Lido continues to gain market share, there is a risk that LDO holders will effectively determine the majority of the set of validators.” The LDO holders in this case are three people. Staking with Lido is therefore, says Ben Edgington, “not better than staking on a central exchange.”

What can you do?

The topic sounds serious. Many Ethereum developers are “thinking about this a lot,” Danny Ryan tells Evan van Ness. “There is a lot of work to do. I don’t develop or do much on Twitter. So I have to rely on you. But I’m not the only one. A lot of core developers are worried.”

For emergencies, Ben explains, “if Lido starts acting evil, we have the ultimate weapon of social slashing – we can (with broad consensus) selectively punish node operators when they behave maliciously.” In the long term, he is betting on Vitalik Buterins Proposal to “anchor liquid staking in the protocol, which would be the safest and most robust path to decentralization.” The idea is based on a blog post by Vitalik, but goes too far here.

First of all, it’s less about the developers and more about the ecosystem. So on Twitter and Co. “I’m so surprised,” says Danny, “where are the competitors? Where is the Vampire Attack? Why doesn’t anyone give a token to stakers who switch from Lido? It is shocking. We have a very competent first mover, but not even a super-incompetent second mover.” The immune system remains worryingly passive.

Ben also relies on increasing social pressure. This “can be powerful. At the end of the day, it’s people who stake, and if they care about the long-term value of their Ether, it makes sense to diversify their staking.”

Because Lido, Danny and Evan agree at the end of the interview, “will devalue the system.” Which almost sounds desperate.


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