I want to thank the Lido governance community for having this important discussion.
Let me present my view, with supporting arguments, and my suggested course of action.
In short, my view is that Lido may do best (for ethereum) to self limit market share for, say, two years. Vitalik’s suggested method of a Lido system upgrade to automatically increase the end-user fee when market share exceeds the target sounds good to me. With this method, I like that Lido effectively converts its market leader position into excess fees in exchange for promoting the overall health and neutrality of the liquid staking market.
However, it makes sense to me that if Lido self limits, that may help any competitor that’s positioned for unbounded growth to rapidly grow its market share and potentially become the “new Lido”. It sounds like Coinbase and Kraken may be considered to be candidates to benefit the most from a Lido self limit.
Yet, Kraken’s ETH staking program is 5x smaller than Lido today (I don’t have Coinbase numbers handy), so the idea of Kraken or Coinbase growing to become a Lido-sized-share concern would require a 5x gain in market share, which in my view, is effectively impossible as other competitors will grow at the same time and work to balance share.
As well and, imo, more importantly, may we reasonably expect Kraken or Coinbase to rapidy launch a fully fledged staking derivative? By “fully fledged”, I mean it seems to be insufficient for Kraken or Coinbase to merely launch a liquid staking derivative, they also may need to engage in the practical work of growing that derivative’s importance in defi to solidify the Lido-sized-share derivative network effect. This practical work may include encouraging stakers to withdraw their derivative from the CEX and use it in DeFi, and doing the community and partnership work to grow defi integrations for the CEX derivative, which may have regulatory implications. Crucially, if Lido self limits and Coinbase fills that void by growing to, say, 25% market share, but if Coinbase doesn’t have a derivative with a mature Lido-sized-share network effect, then the potential credible neutrality threat to eth would be, in my view, an order of magnitude or two less because, as established by Georgios and Hasu’s seminal article on the topic, what may make a Lido-sized share threatening to eth is not that it has 33% share, it’s that it has 33% share in the context of a heavily entrenched, strong defi-side network effect for stETH. If Coinbase has a 25% share but no/a weak derivative, it seems to be no true problem for eth, as Coinbase’s 25% share would be unsustainable without being fueled and defended by a strong derivative.
In short, I think that if Lido self limits, the risk of Kraken or Coinbase becoming the “new Lido” may be effectively zero.
imo, an important context item for my view is that a Lido self limit should be explicitly temporary. Say, for two years. There is a popular view that if Ethereum needs altruistic self-limiting to work, then it’s not going to work writ large. I think this view is substantially correct in general, but, imo, Lido’s current monopoly seems to be highly circumstantial in the early lack of “competitive competitors”. So I think there may just be a temporary need for Lido to self limit for two years, during which time Lido would hover around 1/3 stake or even exceed it, depending on the fee targeting tuning parameters, per Vitalik’s method. At the end of the two years, I’d be interested to see Lido consider removing the self limit-- or perhaps the Lido governance community may end up finding that they enjoy earning the extra fee revenue associated with the self limit.
To zoom out for moment, at a high level, there are roughly two kinds of decisions, reversible ones and irreversible ones. If Lido self limits now and asap, it sets the stage to maximize ecosystem health going into the merge, and if a CEX derivative threatens to catch up and become the “new Lido”, the community may easily revisit the self limit fee target tuning parameters.
I love the idea of the Lido community shipping Vitalik’s method of fee targeting now and asap, before the merge.
For example, Lido could initially target a market share of 30% with a high fee penalty for exceeding that. Then, if a CEX derivative threatened to take over, that 30% share target could be adjusted to 45% or the fee slope could be lessened to a “medium” fee penalty instead of high.
In short, if Lido doesn’t self limit, there seems to be, afaict, a ~100% chance of Lido becoming even more dominant and attracting 35%, 50%, 85% of stake. But if Lido does self limit now, before the merge, we’ll have successfully reduced that ~100% chance to, say, ~0% given appropriate fee targeting. And if Lido’s self limit creates, say, a 50% chance of a Kraken or Coinbase derivative taking over, then Ethereum’s credible neutrality will, imo, be in a significantly better position because of the following three items:
a 50% chance of a Coinbase derivative taking over is significantly less than Lido’s ~100% chance of becoming further dominant without a self limit. I think I have worked to demonstrate that Coinbase’s chance of becoming the “new Lido” is much less than Lido’s chance of becoming increasingly hyper-dominant for the reasons above.
if Coinbase starts to take over, we have immediately accessible levers to gradually relax or wholly reverse Lido’s self limit.
if Coinbase starts to take over, Lido would still have 30% share at this time, and that puts us in a duopoly situation, which, imo, is significantly healthier for ethereum than, without a self limit, the realistic prospect of Lido running 80%+ of staked ETH.
In short, I see (i) a Lido self limit as the only remotely realistic avenue to prevent Lido from soon running a majority/supermajority of stake, (ii) Lido’s self limit as being flexible and reversible, and (iii) the estimated worst-case scenario of a Coinbase derivative taking over as being extremely unlikely and also, if it happened, more like a relatively healthier duopoly.
I think that if Lido may be able to ship a self limit now and asap, before the merge, using Vitalik’s fee targeting method, would be a huge win for ethereum’s credible neutrality. Personally, I’d strongly welcome such a self limit for a temporary period of two years and would look forward to Lido maintaining a ~30% share for years to come.