ReGOOSE: Updated goals for Lido in the light of MVI and restaking

Proposals
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Table of contents

  1. Intro
  2. What has changed since first GOOSE?
  3. Lido and changes to issuance
    3.1 Stay focused on security and decentralization
    3.2 Participate in Ethereum staking roadmap research
  4. Lido and restaking
    4.1 Reaffirm that stETH should stay an LST, not become an LRT.
    4.2 Support Ethereum-aligned validator services, starting with preconfirmations, without exposing stakers to additional risk.
    4.3 Make stETH the #1 collateral in the restaking market, allowing stakers to opt into additional points on the risk and reward spectrum.
  5. Summary

1. Intro

In October 2023, the Lido DAO first established the GOOSE (strategic intent) + EGG (budget) processes as a way to express what they want DAO contributors to work on. By design, the GOOSE is focused on intent (what and why), while execution (the how) is for contributors + future discussions to determine.

At the time, I analyzed that the staking market is dominated by network effects, leading to a winner-take-most dynamic. To reach Lido DAO’s expressed purpose of keeping Ethereum decentralized, accessible to all, and resistant to censorship, and honor its responsibility as a market leader, Lido protocol should be as decentralized and Ethereum-aligned as possible. The resulting “laser focus on security” led to three major priorities:

  • decentralize the NO set,
  • decentralize the governance, and
  • make stETH the most used token in the Ethereum ecosystem.

In this post, we cover what has changed between the ratification of these goals and today. I discuss both internal achievements and external developments, above all the Ethereum issuance debate, and the rise of restaking. Naturally, the magnitude of these developments raises questions about the DAO’s strategy and whether it is still the best course of action or whether it should be revisited. In this post, the first “reGOOSE”, I want to suggest how Lido should react to the changing tides, what should change, and what should stay the same.

In summary, I propose that Lido DAO:

1. Stay focused on security and decentralization
2. Participate in Ethereum staking roadmap research
3. Reaffirm that stETH should stay an LST, not become an LRT.
4. Support Ethereum-aligned validator services, starting with preconfirmations, without exposing stakers to additional risk.
5. Make stETH the #1 collateral in the restaking market, allowing stakers to opt into additional points on the risk and reward spectrum.

2. What has changed since first GOOSE?

In the months since the first GOOSE submission was ratified, significant progress has been made across all of the identified priorities:

Decentralized Governance:

  • The important dual governance design has been completed and ratified by LDO holders. Implementation is in progress with external audits starting in the summer.

Decentralized NO Set:

  • The first staking router modules for Simple DVT added >70 new node operators, including solo-stakers, for the first time pushing the number of operators using the Lido protocol over the 100 mark (goal is 5000 by 2027)

  • Client diversity has continued to improve, with usage of the current majority Execution Layer client (geth) across Lido validators going from >80% in 2022 to 45% today

stETH Adoption:

  • Important milestones in institutional adoption have been hit, including adoption from qualified custodians, regulated entities, centralized exchanges and other participants who recognize the benefits of stETH in security, liquidity and utility as part of a modular stack for institutional products
  • Security-first deployments of stETH are now available on all of the leading Ethereum L2s

At the same time, stETH market share has declined from 32% to 29%, with additional stake sitting in vampire attacks and queued to unstake in the future. The decline in market share has been fueled by the rise of restaking and Liquid Restaking Tokens (LRTs) that attracted stake through billions of dollars in speculation-driven, unsustainable subsidies.

At the same time, Ethereum Foundation researchers have started a debate to dramatically reduce staking incentives, which threatens the economic feasibility of decentralized staking pools.

These two developments, the so-called issuance debate and the rise of restaking, are important enough to warrant a bit of unpacking, followed by my proposal on how Lido DAO should react to them.

3. Lido and changes to issuance

The Ethereum issuance (colloquially dubbed “minimal viable issuance”, or MVI) actually conflates several independent debates:

  • Whether Ethereum should take explicit steps to limit the growth of the validator set, and thereby, of % ETH staked.

  • Whether Ethereum is spending too much on security, and getting incrementally less in return.

Some proponents of changing issuance argue that not capping will eventually lead to a large % of ETH staked, with one or two LSTs “crowding out” ETH as the base token and introducing long-tail risks for security and governance.

Meanwhile, proponents of the status quo argue that effectively capping ETH staked at a relatively low rate could lead to full market capture by centralized providers with cost/scale advantages (e.g. Coinbase, ETFs), crowding out decentralized pools and solo stakers.

I suggest Lido DAO address the issuance debate in two ways:

3.1 Stay focused on security and decentralization

In my view, maximizing the strengths of the validator set and minimizing the risks from LSTs on long-tail security are both important goals, and both sides only want the best for Ethereum. In practice, I see the risk from LSTs as the more manageable problem through continued research and investment in decentralization.

If, on the other hand, the marginal staking rate was lowered to zero today, the effect on said decentralization roadmaps would be severe. Investments into decentralization would have to be cut, hurting not only Lido but also supplier technology like DVT and community staking software, ultimately leading to a more centralized and fragile staking layer.

Today, we are not in that place yet. The grass-roots community has been largely opposed to changing issuance without further extensive research, so the chance of immediate changes (i.e. in the next 12 months) should be low.

I believe that stETH meaningfully contributes to Ethereum decentralization and want the DAO to continue improving the stETH validator set and decreasing smart contract and governance risks, all the while researching possible alternatives to the MVI endgame.

3.2 Participate in Ethereum staking roadmap research

In spite of the criticism the MVI proposals have received, the risks that motivate the issuance debate are important to explore further. The arguments in favor of having a low stake rate are not without merit, but the benefits of having a high stake rate (e.g. maximum alignment between holders and stakers) are underexplored as well, and no decision should be made without deeply understanding their tradeoffs.

We have already seen cyber.fund start a generous research grant to explore the future of MVI, with some prominent independent researchers in the space heeding the call. However, the Lido DAO can do more as well, having contributors who foresaw many future dynamics in staking and have developed strong opinions based on years of on-the-ground experience with staking and network economics.

To that end, I suggest the creation of Lido Research, a new research group tasked with contributing to the future vision of staking in Ethereum, in close collaboration with the Ethereum Foundation, independent incentives and security researchers, and the wider community.

4. Lido and restaking

Restaking is a new economic primitive enabling the same collateral to be put under slashing conditions imposed by multiple validation services (AVSs in the Eigenlayer terminology), increasing capital efficiency for the cost of increased risks. For example, the same ETH might be used as a slashing collateral for Ethereum validation as well as running a data availability node.

When I discussed restaking in my previous GOOSE submission, I saw it as a fundamentally promising technology that would take several years to fully mature. Restaking (in its proper form) adds risk through additional slashing conditions, while rewards from AVSs are expected to remain inconsequential in the beginning.

What this analysis missed is the hype created by EigenLayer even in the pre-product stage, allowing stakers to farm points in exchange for parking capital. At the time of writing, users have deposited 5m ETH (or $15b) in EigenLayer, most of it before any AVSs are even live. EigenLayer rewards were further augmented by new LRTs launching to tokenize these deposits, and AVS partners to use them, each of which with their own subsidy programs as well.

These subsidies are not sustainable in the long-term, but today, they have caused a significant number of stakers to choose the superior yield of Eigenlayer + LRTs over the superior security and network effect of stETH.

I propose the following updated strategy for dealing with restaking:

4.1 Reaffirm that stETH should stay an LST, not become an LRT.

In spite of the current popularity of restaking/LRTs, it would be a mistake to expand stETH into an LRT, for two reasons:

First, as explained in the original GOOSE, more institutional than retail capital is expected to join Ethereum over the next three years. If the Ethereum staking layer is to stay decentralized, then Lido or another decentralized staking protocol winning that institutional opportunity is essential. In my experience, the more risky and actively-managed nature of LRTs does not align with the risk preferences of these institutions today. Much has been invested into making stETH the most secure and liquid LST; becoming an LRT and adding extra risks would undermine this cornerstone of our strategy.

Second, while LRTs can offer higher rewards, their nature is closer to ETH-denominated mutual funds or tokenized deposits in an Ethereum lending market. The key attribute of liquid staking was that it’s a commoditized software offering, but with LRTs it’s less likely that large parts of the market share the same risk/reward preference. As a result, LRTs are less likely to attain a significant network effect and deep liquidity, further limiting their adoption. Their actively managed nature may also make them more likely to be qualified as regulated financial services.

The DAO should stay open to launching additional products on top of stETH, incl. an LRT, if there is sustained market demand for something that feels aligned with the Lido mission. However, stETH should always stay the DAO’s priority, and it should always stay an LST.

4.2 Support Ethereum-aligned validator services, starting with preconfirmations, without exposing stakers to additional risk.

It makes sense to talk about validator services independent of the question of becoming an LRT or not, for two reasons:

  • AVSs can be broadly separated into those that require a validator and those that don’t and can work on any type of collateral.
  • Not every validator service may require slashing to work, and/or the slashing can be isolated to not impact stETH holders.

I believe that Lido should stay at the forefront of what “staking” constitutes and actively explore validator services that support Ethereum’s scaling or security roadmap, and has buy-in from researchers and the Ethereum community.

In 2022, Lido was the first staking protocol to commit to using mev-boost (out-of-protocol PBS) across all of the participating node operators. Its thoughtful MEV policy that balanced MEV maximization with choice for node operators and censorship resistance has positively influenced other staking providers across the industry.

Today, running mev-boost has become a normal and accepted part of every staking operation. It shows that the definition of “what staking is” can expand to include additional services.

In my view, preconfirmations will be the next widely adopted validator service after mev-boost (though I expect them to be more an evolution than substitution of mev-boost). Preconfirmations allow validators to commit to including a transaction outside the current full-block auction to sequence “based” rollups or DEX trades faster than the current 12 second block time, promising improvements across user experience, security, and interoperability.

Lido should become the leader in preconfirmations, and start looking for partners to collaborate with. And it should achieve that without exposing stETH holders to additional base risk, e.g. through the use of a dedicated cover fund for every new service.

4.3 Make stETH the #1 collateral in the restaking market, allowing stakers to opt into additional points on the risk and reward spectrum.

Apart from internalizing Ethereum-aligned validator services like preconfirmations, there is a second opportunity in becoming the #1 collateral used for AVSs that either don’t require validators or are too risky or not Ethereum-aligned enough to pursue in-protocol.

This choice is in line with keeping stETH the most secure and Ethereum-aligned LST. Instead of entering the domain of active risk-management, the DAO should instead strive to give stakers the ability to opt into different points on the risk/reward spectrum, by e.g. depositing stETH into a restaking protocol or AVS in exchange for both higher risk and reward.

This requires establishing a flourishing ecosystem of apps and partners on the stETH platform, and is an effort in ecosystem-building, similar to what Lido DAO once achieved with integrations into Ethereum DeFi and the wider CeFi landscape. It requires deeply understanding the AVS and LRT landscape, forging bonds with key players, and aligning the incentives through key partnerships.

Since DAOs are chronically bad at negotiating strategic partnerships, I suggest the creation of a new ecosystem-building team or initiative for that purpose inside Lido DAO.

5. Summary

In summary, I propose five changes to address the question of MVI/issuance and the rise of restaking:

1. Stay focused on security and decentralization
2. Participate in Ethereum staking roadmap research
3. Reaffirm that stETH should stay an LST, not become an LRT.
4. Support Ethereum-aligned validator services, starting with preconfirmations, without exposing stakers to additional risk.
5. Make stETH the #1 collateral in the restaking market, allowing stakers to opt into additional points on the risk and reward spectrum.

While these are more than cosmetic changes, they leave all of the cornerstones of our previous strategy untouched: the DAO’s purpose of keeping Ethereum decentralized, accessible to all, and resistant to censorship, of building the most widely used LST, of heavy investment into governance and NO set decentralization, and a rising focus on institutional capital.

Since its inception, the Lido DAO has been a deeply mission-driven organization, putting the health of Ethereum over anything else, while achieving a rare synthesis between OG idealism and pragmatic reality. I am happy to bet that continuing on this path, incrementally chipping away at our ambitious roadmap, and playing long-term games with long-term people, will lead to the greatest success in the end.

Disclaimers:

  • I am Strategic Advisor to the Lido DAO.
  • As outlined in the GOOSE, this proposal is submitted in its final form, and the rationale offered explains both the high-level and the lower-level goals. I invite the extended community to engage on the proposal and will happily respond to questions at any time.
39 Likes
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Thank you hasu for a thoughtful and concise analysis of two key strategic inflection points.

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Thanks for the submission, @Hasu!

I’m wondering whether the goals in the format similar to the original post would follow.

Also, as a Tech Lead of the Community Staking project, I’m confused by the fact that CSM is not mentioned in the new proposal. Do you still believe permissionless validation should be a part of the Lido DAO strategic goals?

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AFAIU the post is about “what to change” about the current GOOSE, not “now focus only on that and ditch everything else”.

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Thanks for the explanation! It helps a lot

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Thanks @Hasu, the analysis looks very sharp and I cannot see anything in the proposal I would disagree with.

Keeping stETH an LST and keeping the focus on security and decentralization while supporting preconfirmations and improving the stETH holders’ optionality regarding the risk/reward choices via external integrations sounds like a very solid strategy.

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I’m reading the proposal as supporting the CSM effort since the first item is “Stay focused on security and decentralization” and the CSM initiative is very important for decentralization.

Also, I agree with @kadmil that, since the proposal is about what should be changed in the strategy, it doesn’t list all tactical items that stay the same, just reinforces the most important strategic directions (and decentralization is the first among them).

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I was very excited to see this proposal. Lido must not increase its own risks. But I also have a proposal, suggesting that Lido lock the team’s tokens and DAO tokens until 2027. I think this idea is very important to DAO. Important, important to token holders.We can hold a vote to decide this matter, which should be a perfect decision.

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I find the suggested approach prudent and innovative, not sacrificing the DAO’s approved long-term Purpose, Mission, and Vision.

I personally strongly support this point because the LRT’s risk surface currently has many blank spots. As a consequence, community awareness should still evolve and be enriched with more meaningful data, considerations, and research results on risk exposure, even for the most prominent LRT products. That’s why it makes sense to bridge the opportunity for tuning the individual risk/reward profile rather than terraforming the whole landscape of the staking product, shattering the design assumptions and expectations set a long time before.

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Hi @Hasu, thanks for posting the ReGOOSE updates! This is Fahim from Affine. We are long term supporters of Lido and have been building ultraETH, a stETH focused LRT, with instant entry and fastest withdrawal.

We are happy to read about the continued commitment to decentralization and security and fully agree that stETH should become the #1 collateral for the restaking market and that’s the goal of ultraETH.

Affine team consists of engineers and researchers out of Y Combinator, BitGo, MIT, Harvard, Goldman Sachs and is backed by Jump, Hack, Coinbase, Circle, and more.

ultraETH just completed it’s first audit, and will go live this month. Also, risk management is a high priority for us so we have been building a risk engine and published our latest findings.

We saw @steakhouse’s post and would love to join the LIDO alliance!

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As always, thank you for the thoughtful strategic approach with a long-term view. Staying focused on security and decentralization for one of the only projects in the industry who I believe has reached a higher level of PMF is crucial not only for Lido but for Ethereum itself.

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Hey Hasu, gud read!

Right, so are you referring to AVSs that require essentially economic security/collateral (e.g USDC or raw ETH) on one side, and on the other side, AVSs that require proposer commitments from the current Ethereum validator set?
I believe Espresso Systems falls into the second category and aims to provide a finality gadget for fast pre-confirmations - are you considering it?

Right, so you mean that in some cases, there are no provable slashing conditions (e.g censorship), so slashing would be disabled? In that case, there is a need for a diverse validator set I guess. I am not sure of the slashing conditions for a pre-confirmation AVS - that said, curious about how slashing could be isolated for stETH holders.

Interesting. Doesn’t that mean you would lose the yield of stETH and its liquidity aspect? Or did you mean depositing stETH as collateral to mint another LRT outside of the Lido protocol?

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Correct!

I haven’t seen a concrete design from Espresso but once there is one we should look into it!

In theory, you can also have AVSs without slashing. Many PoS chains don’t have slashing, only the threat of losing current or future rewards, e.g. Solana. Ethereum is more than the exception than the rule here.

For pre-confs, the slashing would be pretty clear: As a blockspace buyer, you want to know that the validator’s commitment will not be overridden later. So, if they end up signing a conflicting block, they should be slashed.

Those two sound like the same to me. So yes, depositing stETH into a restaking marketplace where it can be allocated to different node operators or AVSs. If that marketplace will additionally wrap the deposit into an LRT, you would transact with a different asset, but that’s inevitable if you want to give individual stETH holders different reward/risk options.

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I will be short since it has already been answered, but the other comments are right; the reGOOSE is meant to make incremental changes to the existing strategy, not replace it. The three previous goals (decentralized validator set, decentralized governance, and stETH as the most used token) would remain the same.

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@Hasu

Thank you so much for your detailed proposal. We agree with most of the points you provided, as your proposal addresses key issues that are essential for Lido DAO’s future strategy.

Regarding “3.2 Participate in Ethereum staking roadmap research,” we are particularly keen to contribute. This research would significantly impact Lido DAO’s overall strategy, especially considering the financial implications Hasu described here:

At TanĂ©, we can definitely help the creation of a research group in terms of its program management and facilitation. We also have an idea about how to approach and explore the MVI within Ethereum and we’d love to communicate with the grant team on this.

Concerning “4.2 Support Ethereum-aligned validator services, starting with pre-confirmations, without exposing stakers to additional risk,” this is something we should discuss more on this forum, as this is the first time that we discuss this matter here. We’ve been closely following the discussions on pre-confirmations and inclusion tickets, but the designs seem to be yet to be finalized. Therefore, many factors, such as the risks and costs that node operators or protocols would incur if we adopt these services, remain unclear.
We agree on the importance of exploring Ethereum-aligned validator services, but suggest starting with pilot programs to test these initiatives before making Lido DAO’s policy on Ethereum-aligned validator services.

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Hi Hasu, I fully agree with the first four points you summarized, as they represent the internal strategy you and Lido are committed to. However, regarding the fifth point, you need to give it more consideration.

Your explanation of making stETH the #1 collateral in the restaking market lacks persuasiveness. People will choose where to stake their ETH based on yield differentials, and the rising ETH staking rate coupled with a decrease in Lido’s market share is the most direct indication.

The endgame of restaking is for native ETH staking to dominate, and the current Eigenlayer phase merely positions stETH as a transitional asset for restaking, much like Puffer converting all stETH to Native ETH. Meanwhile, despite significant redemptions, Lido’s operating costs have not decreased rapidly, which could be one of the reasons for Lido’s losses.

If Eigenlayer no longer supports stETH as a re-staking asset and guides users to redeem stETH for Native ETH, thus eliminating stETH from the pool of assets available for restaking, then your assumption would no longer hold. Currently, Ethfi does not support stETH for restaking, Renzo only holds a small amount of stETH, and Puffer has converted all stETH, indicating that stETH is merely a transitional asset for restaking.

Overall, it’s not aggressive enough. Lido hasn’t taken a combative stance to address the threat Restaking poses to LSD Staking. While “winner takes all” was applicable two years ago against slightly weaker opponents, re-staking represents a deeper, more foundational adversary, with a better narrative, agents(Ethfi、Renzo), and seemingly attractive business propositions threatening Lido’s survival.

Once Lido loses its leadership position and dominance, the scenario between Eden and Flashbots could repeat itself, where the restaking protocol could easily support another “Eden” to rewrite the rules of the MEV.

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The team’s ideas have always been too idealistic, which has led to the poor performance of several other chains in the re-staking track except Ethereum. This needs reflection. If it weren’t for lido’s first-mover advantage, do you think you could have so much Ethereum pledged on lido today?
New narratives are constantly changing, and those who cannot keep up will be eliminated. The team should communicate more with the community. What does the community need? How should the project be improved? Is there something wrong with the LDO token mechanism? This all requires communication. The wisdom of the crowd is infinite. Especially LDO token holders. It is unjustifiable that I have bought this token for so long without any profit.

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Snapshot vote started

Please get your wallets ready to cast a vote :white_check_mark:, the ReGOOSE: Updated goals for Lido in the light of MVI and restaking Snapshot has started! The Snapshots ends on Thu, 23 May 2024 16:00:00 GMT.

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Hey, thanks for your comment!

If you allow me to steelman your post, you are saying that existing LRTs are rarely using stETH, and you extrapolate from there that LRTs will not use stETH in the future. I would offer a few counter points to that:

  • current LRT business model is to redistribute Eigenlayer points. all of them have to pivot their business model if they want to survive after the airdrop phase, and that may look quite different from the status quo.
  • some LRTs may try to get by with vertically integrating into staking + restaking themselves, but that will put them into direct competition with LSTs like stETH. LRTs suffer from lower liquidity, higher regulatory burden, worse brand, and higher risk. they compete on higher rewards, but outside of reaching a significant scale even this will be hard.
  • once multiple restaking protocols compete for users, its harder for any of them to keep a cap on stETH, because underserved stETH demand will go to their direct competitor instead. in fact, restaking protocols are already competing on serving any token, not just ETH. most restaking is expected not to be done through Ethereum validators.

all in all, you are extrapolating from a time when Eigen points farming is the only meta there is, but we all know this time is coming to an end. the real questions should be, 1) how can we limit the damage until incentives run out, and 2) what should be our approach to restaking afterward?

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Based on the assumption that LRTs will ultimately become LSTs, I infer that in the future, LRTs will heavily transition excess assets (stETH, rETH, LSTs) to native ETH staking. Simply staking LSTs does not constitute complete restaking. You may be referring to something like Karak, which attracts LSTs and LRTs through asset-based means to form a simple competitive Restaking.

My point isn’t that LRTs will no longer use stETH, but rather that they will continuously absorb stETH and convert it to native ETH staking until Lido’s share continues to decline.

The Issue of Lower liquidity: 1) The cost of providing LRT liquidity is high, and Lido spends a lot on this. 2) Market arbitrageurs will always take the chances of getting premiums. Take RzETH’s short episode of unanchoring and then re-anchoring for example, it hasn’t affected much. 3) Unless LRTs want to gain more use use-cases like LSTs, they have no reason to spend too much on liquidity costs. 4) Users who use LRT with less liquidity have other considerations, higher yield for example. That’s all part of users’ own risk assessment process.

Higher regulatory burden: Applicants for ETH ETFs have removed descriptions related to Staking, and this issue is consistent for LSTs and LRTs. Doesn’t Lido need to face this problem?

Brand: Protocols with over 1B TVL have decent brands, which one do you think not? Plus, users are neighbor with any project team, and care less of branding than you think. Larger-scale projects like etherfi, Renzo continue to offer higher returns, and their tokens have a higher FDV than Lido.— Users will mostly always look at these factors.

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On your third point, you’re right. If stETH is not accepted, it indirectly incentivizes competitors, and not fully serving ETH, Symbiotic also directs ETH restaking demand to competitors, or Symbiotic also accepts ETH but fully retains transition excess assets stETH.

Restaking occurs not only on Ethereum but also on any POS network (Solana/Celestia/
) or BTC ecosystem are doing similar things. I think we should narrow the discussion to the Ethereum staking layer.

There will obviously be a second and third season after the first season of Eigen ends, and this era will not end (just like TVL continues to grow after the first season of Etherfi ends), and higher incentives will not disappear.

I’m afraid I haven’t seen Lido taking more aggressive measures to limit the damage. Do you think CSM/Lido Alliance/Symbiotic can constitute a total game changer?

I don’t know what answers you have in mind for the two questions you raised. Can Lido compete with LRTs on the business level of DA and AVS? What if their incentives keep coming? What if it’s not a one-season altcoin? I think it’s better to work out something for Lido itself rather than hoping a phase to fade. :slightly_smiling_face:

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