The Evolution of the Lido Community Staking Module
Since its launch in October 2024, the Community Staking Module (CSM) has become an essential part of the Lido on Ethereum protocol. Since then, an estimated 300+ independent Node Operators have joined Lido on Ethereum via the CSM, meaningfully improving the distribution of Node Operators using the protocol to run validators.
CSM has enabled permissionless entry to the Lido on Ethereum protocol, not compromising and, in many aspects, strengthening its resilience and robustness. CSM validators demonstrate competitive performance compared to other permissionless staking solutions. All CSM validators are secured by a stETH bond, which serves to mitigate possible malicious Node Operator behavior, bad performance, and non-catastrophic slashings. Through this mechanism, CSM Node Operators have also brought more than 8k new ETH staked to the Lido on Ethereum protocol. These examples clearly indicate that CSM was a step in the right direction for the evolution of the Lido on Ethereum protocol.
Thus, there’s strong reason to believe that scaling permissionless participation in the Lido protocol can accelerate in 2025 (note that apart from CSM, other permissionless elements are being worked on, such as a DVT-based module using SSV and stVaults). To further support this effort, some Lido DAO contributors have put together a preliminary vision regarding the future development and evolution of the Community Staking Module (CSM), known as CSM v2.
First, we should start with the goals for the next iteration of CSM:
- Continue scaling of CSM to a double-digit percentage share of the Lido on Ethereum protocol;
- Further enfranchise significant participation of independent Community Stakers;
- Make CSM’s rewards share structure competitive with the other staking modules in Lido on Ethereum and with the overall market.
The vision of CSM v2 can be drawn piece by piece from the goals outlined. This post contains a set of proposed high-level features for CSM v2, with a more in-depth technical document available for the community to dive deeper into.
Continue scaling of CSM
To accelerate secure and reliable scaling of CSM, the following features are required:
- A system that will prevent systematic bad performance of CSM validators;
- Improved precision of the existing Performance Oracle;
- Integration with the Lido on Ethereum protocol implementation of EIP-7002 (Triggerable Withdrawals);
- Rationalized rewards share values.
Most of these features are primarily technical. Hence, the technical document linked at the end of the message presents a detailed description of these features.
In light of the above, as well as the current state of stake allocation in the protocol and pending validators, ideally, the following conditions should be met before a potential share increase for CSM:
- CSM should reach its current share limit;
- SDVT should have all of the currently depositable keys deposited;
- Curated Node Operator Pier Two should get at least their first 100 validators deposited (since after the rotation, they are sitting at 0 active keys following the Snapshot vote in Nov ‘24).
Facilitate meaningful participation from Community Stakers
The term Community Stakers in the document below refers to a superset of independent Ethereum Node Operators (stakers). This term encompasses any independent entity (a person or a group of people) whose values align strongly with Ethereum and whose primary motivation to operate validators is not financial.
Encouraging significant participation of Community Stakers in CSM is a key goal; however, mechanisms to promote favorable representation of Community Stakers in a permissionless module are complex and not foolproof.
While many new Node Operators have joined CSM’s entry queue since its share limit was increased to 2%, the module’s available capacity for Node Operators to join was exhausted within two hours, with much of that capacity occupied by professionals or other large operators. This suggests that some fine-tuning of the incentive structure to benefit identified Community Stakers versus others would allow for a more significant positive impact on the decentralization of the Lido Node Operator set.
One of the most exciting potential CSM V2 features is the introduction of Entry Gates. As explained in the technical document, Entry Gates would allow for custom entry pathways for CSM Node Operators, allowing for Node-Operator-type-specific features including:
- Customizable Node Operator reward shares;
- Priority deposit queue eligibility;
- Differentiated performance thresholds;
- Security-related parameters.
With the introduction of Entry Gates, one of the strategies that can be used to incentivize the growth of Community Stakers is to:
- Develop or extend preexisting mechanisms to identify independent Community Stakers;
- Allow them to join CSM with special Node Operator types / upgrade their existing Node Operator to a special type;
- Provide a set of limited benefits for these specific types.
While the details of possible identification processes are still being researched, the other two aspects, namely Node Operator type assignment and sets of limited benefits, are already reflected in the technical document.
Priority deposit queue eligibility would allow identified Community Stakers to get a limited number of validator keys to be placed in a priority queue. This queue is processed before the default one, allowing them to start operating their first CSM validators without competing with the general permissionless participants, including large professional operators.
A custom Node Operator reward share framework could also provide a beneficial rewards structure for identified Community Stakers. This beneficial structure should be limited; that is, an increased Node Operator reward share might be applied to the first X validators per identified Community Staker. In contrast, the reward share for subsequent validators would be identical to that for the general permissionless participants, thereby providing an incentive for Community Stakers to participate in CSM but metering potential abuse of this mechanism by large organizations or capital allocators.
It is suggested that any potential change to the CSM reward structure would also include a “grace period” for existing CSM operators to remove their previously submitted keys without a key removal charge.
Competitive CSM fee structure
Currently, CSM has a flat rewards structure, with the module fee set to 6% and all CSM validator rewards distributed among CSM Node Operators. This approach is limited in terms of flexibility, and initial data suggests it is very lucrative for professional operators. Simply put, in order for CSM to scale it should be competitive with other Modules (as well as the overall market) through a reasonable economic equilibrium in terms of the utility it provides the protocol as well as the utility it provides to Node Operators. It is neither desirable nor scalable for professional Node Operators to be paid “more” than they would be in the Curated Module and, at the same time, take up a large amount of space in the permissionless module.
The proposed solution here can be made out of two parts:
- Introduce a variable Node Operator reward share described above and in the technical document to allow for different reward shares for different Node Operator types depending on the number of the validators controlled by the Node Operator.
- Reduce the reward share for Node Operators “by default”, thereby affecting the permissionless Node Operators and validators controlled by Community Stakers over a certain threshold;
- These two parts could incentivize Community Stakers to participate with continued market-leading capital efficiency while reducing the likelihood of professional operators from filling the queue.
A summary of the points above can be framed as follows:
- Reward share for the general permissionless operators and validators controlled by Community Stakers (and/or other Node Operator types which could be defined at a later date) over a certain threshold should be reduced to values below 5% in CSM v2, but not to the extent that the overall capital efficiency of bond rebase rewards + NO rewards are no longer competitive in the market;
- Following an updated post-Pectra risk analysis and considering the increased robustness of CSM v2 against low/bad performance, bond values may be adjusted for both general permissionless operators and identified Community Stakers to support a resulting capital multiplier competitive with other permissionless staking solutions.
Conclusion
While still in its early stages, CSM has made meaningful progress toward improving the decentralization of the Lido protocol, with over 300 Node Operators onboarded in only 3 months from the launch date.
Given the strong desire by both contributors as well as the community to increase both the scale of CSM as a share of the Lido protocol, along with the distribution of Community Stakers, it is suggested that CSM v2 be tuned to incentivize the growth of the independent operator base in a way that is competitive to the other modules in the protocol.
Through the above-proposed features and economic approaches to operator set rationalization, it would be practically feasible for CSM’s stake share to grow to a double-digit percentage of the protocol. This would allow hundreds, if not thousands, of new Community Stakers to join the Lido on Ethereum protocol with beneficial conditions, and would stand to make CSM (if considered in isolation) the largest permissionless LST-powering validator set on Ethereum.
Call to Action
We welcome the community to read this post and the more detailed technical document and provide feedback and suggestions while the development team continues to investigate the scope of potential features for CSM v2.