I want to signal strong disagreement with this proposal, as the underlying incentives create systemic risks for Ethereum with potentially irreversible consequences.
Lido has publicly positioned itself as a decentralized option to fight CEX growth.
However, this proposal clearly targets decentralized solo stakers and Rocket Pool, by offering an increased APR which is subsidized from Lido’s monopolistic position.
In its current form, the CSM would improve the Lido NO diversity, but would have a negative net impact on the decentralized staking ecosystem, as it would incentivize stETH growth at the expense of decentralized alternatives.
@dgusakov pointed out the following selling points for operators:
- EL rewards and MEV are smoothing using Lido’s outsized operator set, which no staking pool can match
- Lower bond than decentralized alternatives like solo staking and Rocket Pool
- Using stETH for bond and rewards, further centralizing into stETH
- More profitable than vanilla solo staking [and potentially Rocket Pool]
Further, this proposal offers a 7.5% fee to Node Operators, which is higher than the 5% regular fee to permissioned operators, signaling that the goal is to subsidize APR in order to convert operators from decentralized staking protocols.
If this proposal uses a minimum bond of 2 ETH as depicted in the Devconnect Staking Gathering talk, Lido operators will earn 2x higher rewards than with solo staking (8% vs 4%), which result from 90% rewards from the stETH bond + 7.5% of rewards from the 30Ξ matching ETH provided. If a 4 ETH is used, the ETH yield would be 5.7%.
- Current solo staking rewards: 4%
- Rocket Pool current ETH yield: approx 5.5%
- Lido’s proposed yield seems to be 5.7-8%
A rational Node Operator observing this will shut down solo staking and Rocket Pool setups in order to migrate to CSM. This can cause massive and irreversible loss of decentralized staking diversity for the only benefit of growing stETH.
This is further aggravated by the possibility that Lido will provide financial incentives to solo-staker software providers or node clients, which can drive their UX to favor Lido installations over other decentralized alternatives.
While this proposal could be a net positive in a world where Lido self-limited, the reality is that Lido continues to increase its dominance with a stated goal to replace centralized staking.
The size of stETH has already been an extremely contentious topic, with the risk of social slashing looming over Lido. This proposal should not pass without modifictions, as it can damage Ethereum’s decentralized staking and further increase the risk of social slashing for Lido.
Considering this, I suggest modifying this proposal to Ensure that the Operator ETH APR never exceeds the solo staker ETH APR. Offering smoothed rewards and lower barrier to entry is already an outsized benefits to operators.
With these changes, Lido can prevent damaging decentralized staking and also benefit by collecting higher fees or increasing collateral levels from its permissionless operators.
Alternatively, a self-limit on Lido’s total share of validators can be discussed in order to not grow at the expense of decentralized staking, which fulfils and crucial role in the ecosystem.