Should Lido on Ethereum be limited to some fixed % of stake?

Glad we finally got this out there :slight_smile:

From my perspective the way that the argument to limit staking solutions as a whole has been put forth, and the assumptions it makes, do a disservice to the Ethereum community. This is not to say that there is no risk and that it shouldn’t be considered; in fact I would argue that Lido has been incredibly candid and honest about the risks that the protocol and the product present in general, what mitigation mechanisms exist or have been identified, and what the plan is for them to be implemented and improved on. Ultimately, however, the question at hand fails because it does a bad job in presenting the risks at hand, and it presents a specific solution as the only viable option even though ultimately it’s not.

For one, it lacks nuance. It’s really not that simple as “any one organization with dominance introduces existential risks”, because “one organization” and “dominance” are not simple things to define, and differ greatly when you compare different organizations and what and how much they can influence things. Second, and most importantly, it obfuscates the much larger, more immediate, and potentially more ruinous risk which is “how much direct control does any one or set of entities have over the network” by conflating organizations/entities of different type and not considering the differences between direct and indirect control. Not only does it draw attention away from this risk, but it explicitly allows for entities with direct control to amass critical power because it focuses on “umbrella” entities/organizations instead of examining the entities where the locus of power really lies.

I’ve put together a document detailing my thoughts on the staking landscape (warning: long and not beginner-friendly) in Ethereum, and I’ll be pointing to relevant portions of it in my summarized argument below.

In the end, limiting the leading protocol only allows other protocols to play catch up. Some will argue that “if they catch up, we can revisit”, but this is not very reasonable. Why give them the opportunity (and power) that comes with catching up at all? Is the risk that’s introduced (and overall detriment to decentralization) worth it? The protocols that will catch up the fastest are ones that can leverage economies of scale and are unconstrained from a supply perspective. The reality is that there is a lot of capital waiting on the sidelines to enter the staked ETH market which is waiting for the merge to be done with (and likely withdrawals too). This capital is most likely to enter via KYC/AML onramps and offramps, especially if more KYC-friendly solutions take off or finally release their liquid staking token. Everyone is looking at the landscape now and ignoring what the landscape will most likely be in 12-18 months from now. Placing limits and constraints now is going to make competition later magnitudes more difficult, and the best solution is not to constrain the market leader but to do everything we can collectively to make it the best version of itself.