Proposal: [Hasu’s GOOSE-2 Submission] A Product Line Approach to Grow Lido’s Staking Ecosystem
Link To Discussion: Blockworks Opinion
Blockworks Vote: Abstain
Introduction
Our goal is to objectively inquire about the potential positive and negative impacts of GOOSE 2 on Lido.
Key Takeaways:
- Adding a beachhead for Custody Providers to minimize liability for institutional holders
- Removing “Aligning risk/reward between more and less risky modules” from the GOOSE 2 proposal because it limits ingenuity by enforcing the “how” of building the validator marketplace.
- Including a source in the GOOSE 2 proposal to find the three-year goals of Lido from ReGOOSE.
[TOC]
Extending The Discussion Period
In part due to GOOSE being a requirement for EGGS and the current spend expiring at the end of the year, we alter our stance to move forward with the proposal at the assigned interval.
Considering Hasu’s recent mention in the Goose Guidelines Topic, we still believe that this proposal should explicitly state where to find Lido’s three-year goals (Source).
Previous Successes Of GOOSE
We’d like to congratulate the team on significant successes including enhanced decentralized governance with increased LDO delegation and participation, an expanded validator set from 37 to over 400 node operators—including many solo stakers—and stETH becoming the ecosystem’s most used token, advancing toward top staking collateral status, all achieved without any security incidents.
What Do The Target Beachheads Want?
Per Hasu’s observations vanilla stETH underserves customers such as HNWIs, ETF/ETP providers, and neo banks. Additionally, stETH should continue to expand its offering towards restaking and lending services. We are in line with the horizontal expansion of Lido to capture institutional holders, restaking services, and lending markets through a diverse and synergistic staking product suite.
Not only is Lido’s vision imperative to offer a risk-minimized LST to customers but also its success is inextricably linked to Ethereum’s decentralization. Through horizontal scaling we feel like a continued focus on stETH positions Lido to succeed by capturing vertical layers that will either become or currently are dependent on a source of risk minized yield/collateral.
Now we need to position Lido to continue be competitive in the increasingly diverse LSP market. The question is on what basis should it compete?
Lido’s future moat depends on answers to these fundamental questions:
Questions of why & what for GOOSE 2
- While we don’t hold a strong opinion on MVI, If MVI poses a credible threat to the decentralization of Lido—and consequently Ethereum—should Lido explore alternative avenues to generate yield for stETH holders to mitigate this risk?
- What do institutions care about from an LST and LSP perspective (e.g. APR, NO customization, security, simplicity, liquidity, take rates, staking representatives, investor relations representatives, custody solutions, customer service, trust, track record of execution, technical risk)?
- What do custody providers want from their LSP and LST?
- What do stETH holders want (e.g. APR, decentralization, using stETH in restaking w\ slashing conditions, liquidity)?
- What does Ethereum want from Lido in the coming years?
- What do restaking platforms, lending platforms, and node operators want from Lido?
Questions of how for GOOSE 2
- Since Lido wants to capture institutional holders we need to understand what do current institutional delegate voting services (e.g. in the stock market with BlackRock, State Street, and Vanguard) excel at?
- While decentralized governance is a massive advantage Lido should be proud of, we wonder what barriers to institutional adoption the Lido DAO creates. For instance, should the fast track be longer than four days to allow these stakeholders or their institutional delegates time to vote?
- Are there previously allocated internal Lido resources that can be reused for product line expansion?
- Without a comprehensive analysis of the current efficiencies and inefficiencies of Lido’s governance system, how will we fully understand the impact of Lido’s product offering on governance capture – is it worth the risk in the short term to pursue expansion? (i.e. governance capture: the distribution of power and prevention of a single faction from dominating decision-making)
- How, by holding stETH, can we create an environment that is both positive for Ethereum and competes on APR?
- How can Lido care for the customer better than Coinbase or Binance staking?
- If institutions and their custody solutions do not want to run their own node on chain, how can we enable more customizability?
Thoughts On Beachhead Questions
Seeing as GOOSE focuses purely on the why and what of Lido’s future, in general, our thoughts on the above questions are as follows:
Custody Providers And Institutional Capital: We believe adding a fourth beachhead for Custody Providers to the three mentioned would be advantageous for Lido. Coinbase’s vertically integrated custody solution and Binance’s strategic partnership with Fireblocks are one of the primary advantages these centralized exchanges offer institutions over Lido’s current staking offering. Institutions deeply care about driving higher returns to holders in a manner that is liquid, fault-tolerant, risk-minimized, minimally liable, and battle-tested. By its very nature, Lido competes against CEX advantages by removing middlemen, decentralizing NOs, and maintaining a longstanding legacy. Lido has the potential to offer an LST with competitive APRs, liquidity, and less technical risk, making it a tempting choice. Yet, Lido does not currently offer minimal liability and should strengthen integrations with Custody Providers. Compounding Lido’s disadvantage, institutional holders may have a fiduciary responsibility to participate in Lido governance but have no trusted “traditional” institutional delegate representatives to offload this burdensome risk (recent legal precedent).
Ethereum Ecosystem And stETH Holders: As Hasu rightly mentioned, LST holders are “chasing the hot ball of rewards,” we see this trend lasting. Lido becoming more competitive on APRs is paramount for institutional and retail adoption. Although we are agnostic as to whether MVI is a constant and continuous credible threat to Lido’s future, the prospects of a looming potential decrease in issuance paired with the desire for the “lowest take rate that allows Lido to be sustainable and secure” indicates a need for other sources to impact APR positively. Consequently, we find it reasonable to diversify risk by pursuing other avenues to increase APR.
Restaking And Lending Platforms: The market for restaking may be immature, but we see lido’s action as a positive movement to capture downstream markets that could be primarily based with stETH. We hasten to mention that Restaking platforms’ desire for additional slashing conditions poses a risk to Lido NO that has not been comprehensively reported on. Continuing with our thoughts, Restaking and Lending platforms have many similarities; they both require liquidity and compete on the variable cost of that liquidity. Restaking is only as profitable as liquidity or validation cost is cheap, whereas Lending is only as profitable as the cost of capital is low. These two target beachheads are synergistic and want the same things from stETH.
Fee Switch
Unfortunately, we can not comment on the fee switch. We can say that higher APRs could be interesting for the 4 target beachheads we previously mentioned.
Validator Marketplace
A validator marketplace and performance threshold mechanism have been discussed for a while. It is unclear whether a validator marketplace will positively or negatively impact Lido’s main value proposition, decentralization. We have some concerns and questions that we think the community should seek answers to.
Validator Market Place Questions And Concerns
- How will the free validator marketplace affect institutional, restaking, lending, and custodian adoption of stETH? Are there synergistic opportunities between this initiative and others within GOOSE 2?
- If Ethereum moves towards a smaller issuance rate and the validator marketplace offers a larger percentage of rewards to those validators doing the best (as defined by this discussion), won’t the CM outcompete the SDVT and CSM, possibly leading to centralization?
- Is GOOSE 2 enforcing the “how” by stating, “Aligning risk/reward between more and less risky modules”?
- GOOSE 1’s three-year goals focus on decentralization and curating an opinionated validator set; how does the validator marketplace uphold these objectives?
- Is the validator marketplace a truly free market?
Thoughts On Validator Market Place Questions
GOOSE 2 enforcing methods of implementation: Our concern is that by explicitly stating that the validator marketplace must work across modules rather than being agnostic to the implementation of the marketplace, ingenuity is limited, and potential modification is required down the line. We provide an example in Appendix A of a system that is not cross-module, thus goes against GOOSE 2. Regardless of whether the system in Appendix A is substantive, the important point to emphasize is that it GOOSE 2 is supposed to maintain neutrality regarding the methodology (‘the how’), which it does not do.
Evaluation of GOOSE 2 implementation: Because the current GOOSE 2 proposal comments on how the validator marketplace should function, we will evaluate the implementation. At present, it is unclear how a meritocratic performance threshold across modules will affect decentralization of the NO set. While uncertain, it appears that the implementation across modules may be in opposition to the ReGOOSE & GOOSE 3-year goals of 5000 validators because the CM might be rewarded the most. With the system proposed in GOOSE 2, we must weigh the cost of centralizing Lido’s validator set by pushing out node operators from the CSM who will be outcompeted for rewards by the CM versus the aggregate quality of the set. Moreover, withdrawing from socialized reward systems may introduce module-specific dependencies.
Governance Capture Of Meritocratic Rewards Systems: To address potential centralization in a module rewards system, one might propose setting a ceiling on module rewards; however, this directly increases the risk of governance capture. An attribute of the CSM that we really enjoyed was how the smoothed rewards and performance threshold mechanism upholds a meritocratic self-elected validator set. In the CSM, an open, competitive, and positive form of liberal welfare elevates the quality of the CSM validator set. Whereas across modules, the permissioned, curated, and closed institutional NOs in the CM may result in higher levels of centralization and governance capture.
Overall Thoughts On GOOSE 2 Validator Marketplace
In total, whether or not the current module-based compensation impacts decentralization, GOOSE 2 should maintain an agnostic stance on the validator marketplace to allow for unfettered ideation and creation.
We agree that, if implemented correctly, an open market for validators enables diverse product offerings, node operator decentralization, and cost efficiency.
APPENDIX A
With the recent successful onboarding of 200 operators to the CSM we think that leaning into its open competitive nature may propel Lido to its three year NO decentralization goals (Source).
Our example demonstrates an approach that does not distribute rewards across modules. Instead, it aligns incentives in an automated manner that minimizes governance capture and centralization risks with institutional capital or custodian providers that demand more nuanced node operator setups and restaking platform users/AVSs willing to subsidize node operators for inheriting slashing conditions.
We do not wish to remove stakeholders’ right to choose by merely incentivizing the best node operators across modules. Instead, we set minimum standards for validators in the CSM who have consistently performed over a given period to be included in the on-demand validation service.
We cannot envision a scenario where large ETFs operate on-chain infrastructure, so “Bring Your Own Validator” (BYOV) doesn’t seem practical. Instead, we propose a two-sided market that leverages the elastic supply properties of the CSM to meet each institutional holder’s, custody provider’s, and AVS’s specific needs. If institutional holders want high availability and low slashing risk, they can pay for the increased complexity of node operations in an open market—specifically within the CSM—where validators can fulfill their requests and use the funds to scale operations up or down. If they require a specific Trusted Execution Environment (TEE) on their node, it will cost extra. If they don’t mind occasional downtime, they can pay less. If an AVS wants to add additional slashing conditions, it will incur additional costs. This system hinges on the accountability of node operators to run the requested hardware and fulfill orders on-demand. In line with the performance incentive thresholds in the CSM, validators who do not meet the client’s requested performance levels can be disproportionately penalized as a punitive measure.
The open validator market we propose leverages Lido’s existing infrastructure. The key point is that this strategy offers products to restaking platforms, institutions, and custodians while enabling automation, competition, and decentralization.
A thoughtful skeptic might worry that this approach could push solo stakers out of the market. However, this is not the case because those paying more should receive more customizable solutions, while those customers paying less won’t qualify to participate in the open market of validators. This creates a base validator set (analogous to a base fee) to handle standard requests and a priority validator set (similar to a priority fee) to manage top-tier requests. Finally, this system should still enable socialized rewards across modules, which we believe are essential for reducing module-specific risks.
We must note that further research on the demand for such a system and its potential efficacy would be prudent before integration.
, it’s the same blockworks as this? 
