I think the main problem with current proposed solutions is that they either harm Lido disproportionately, or are fundamentally unfair (increasing the performance fee while withdrawals are impossible).
Alternative solution: introduce a small deposit fee when Lido’s share is above some threshold - charged in ETH during a deposit.
A linear deposit fee that starts at 0% at a 22% share in total staked share, and ends up at 100% at (obviously impossible) 100% achieves the following:
- generates a liquid ETH treasury right now. Potentially could be used to burn LDO, or distributed to LDO stakers. Distribution details are beyond the scope of this thread.
- substantially helps the stETH peg without spending LDO to defend it, because with such a fee it makes sense to buy stETH even slightly above 1.
- they don’t unfairly change the terms for existing stakers that can’t exit.
I think the second point is strong enough to think about a deposit fee regardless of the stance on the centralization issue - although maybe with less aggressive fee levels.
Why should something be done?
I’m not worried about LIDO stakers being hostile, but the issue is that they aren’t anonymous, leaving them vulnerable to hostile governmental regulations.
The main risk is that perceived vulnerability to such regulations makes their existence more likely - no government wants the humiliation of legislating a law that can’t be realistically enforced. While I think that even with much higher LIDO concentration the worst case scenario is a period of chaos and rapid disappearance of custodial staking - such regulation would greatly harm the whole ecosystem, including the value of ETH and especially LDO.
In the medium term, I think staking pool dominance is a temporary consequence of no withdrawals, and eventually the issue will solve itself. Small stakers with less than 32 ETH are still going to use them in the future - but larger stakers are going to solo stake to not pay any performance fees.
What about competition from exchanges?
I agree that growth of stETH is preferable from dominance of exchange staking. The main advantage of stETH is its value as collateral and high liquidity - which isn’t easy to compete with at this point. Even if it starts to happen, it’s not going to happen overnight - and if they actually start growing too fast all limits can be removed.
What is the safe dominance level?
Outside of specific risks, any single staking pool becoming too big is simply bad marketing for ethereum.
Given that value of LDO strongly depends on the value of ETH, I think regardless of technical/legal arguments, there’s a an optimum point beyond which growth of LIDO eth staking (as a fraction) directly harms LIDO itself.
I think everyone can agree that stETH growing to (virtually impossible) 100% of staked ETH would be very bad and should be avoided.
At 0% the problem of course doesn’t exist.
Therefore, there’s some dominance level between 0% and 100% at which LIDO should start to self limit its share via some mechanism.
Which means that instead of a binary question: should LIDO try to self-limit now, I think there are two separate questions to ask: what should the limiting mechanism be and at what dominance level should it activate.
A linear deposit fee is a very simple mechanism with one parameter: dominance level at which fee starts being positive. This makes it easy to vote on - a weighted average vote for the minimum percentage value.