Is CEX safer than LDO?i dont think so,be youself,Lido
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Adam, this has been a good debate, and I appreciate your perspective. Yet, I want to be clear here that my only specific interest is in helping to prevent a Lido majority/supermajority.
Lido is a great team and an amazing product. But, it seems that ETH holders would rather not exist in the timeline where Lido runs 30%, 50%, 70%+ of stake for years to come.
The ethereum community has spent years investing in maximizing credible neutrality via client diversity, our research community, etc. We think the liquid staking industry deserves a real chance to become an oligopoly instead of a monopoly.
Unfortunately, nobody has a better idea to curtail Lido’s hyper-dominance with certainty other than pleading with the Lido community to altruistically and voluntarily self-limit market share for a temporary period of two years while competitors catch up.
Thanks to Vasiliy and the whole Lido team and community.
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first, lido is not only a staking solution but also builds a defi token to release the locked liquidity of eth2.0, which means it’s an independent project in the eth ecosystem like uniswap, aave and others. Limiting market share of lido equals to considering lido as an affiliate to eth — designers want to limit lido’s share to guarantee eth safer, which will reversely prove that eth system’s antifragile is very weak.
Second, to easily change/fix a project’s market share is also a centralized behaviour, targeting only at the symptoms but not the cause. if it happens, others can create lido’s fork, or through some bussiness manners, to create more projects simlar to lido. Will it make sense?
Third, users will choose the safest solution to stake their eth, it’s a normal market behavior. In the past, the choice was CEX, which using revenue and management skills to convince sustomers. Now, we have lido, the kernel of which is tech and team. Instead of directly limiting its shares, maybe we could design some mechanisms to make eth staking follow the law of diminishing marginal utility.
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Accumulating > 50% of total possible voting power (which is max supply less locked tokens less tokens that can’t vote (e.g. tokens in the treasury) is not that simple).
a) This amount of tokens isn’t actually circulating, so you can’t just go buy them off the market in one go
b) The capital required to purchase all these tokens is not equal to current price * number of tokens you want to buy. When you purchase large volumes (especially of an illiquid token), price per token shoots up dramatically.
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On a high level, I have no problem with a single liquid staking protocol having any share of staking in a protocol as long as the following holds:
- it delivers a decent validator set
- there’s a possibility to opt out of the protocol for the stakers which is simple and near-free to execute (in other words, there is a free market of solutions)
- it’s under the governance of the protocol in question (basically, is onchain and doesn’t have defensive mechanisms against protocol governance takeover)
- there are enough safeguards in a protocol that any possible changes to the 3 points above are telegraphed early enough for an opt-out/protocol governance takeover to be possible in a reasonable time
- implementation risks of 1-4 are negligible
Even more, I think that this situation is not just okay, but is desirable because I believe it to be the only economic equilibrium that is good for the protocol in question. I think that forced equity of protocols that is propped up by a private, untransparent “informal working group of liquid staking oligopolists” (that does not, to my knowledge, include a single person from the market leader) is not an equilibruim. There will be centralization in staking in some layer of the stack, and it’s in everyone’s best interest to have the biggest entity maximally constrained on-chain (as opposed to constrained by the fickle things like regulations or social pressure). Smart contract-based constraints on an incentive-compatible solution are stronger than hopes and prayers and senseless shaming on Twitter.
Now, of the five points above Lido admittedly crosses only 1 and 3, and crossing 2 is technically impossible at this time. It might be a prudent tactical decision to have some form or limit or anti-incentive on staking, even if there’s no sense in having a strategic decision like that (to reiterate, that’s a personal opinion).
From a practical perspective, at the current moment, Lido is not a risk to Ethereum and is in fact reducing the risk. We contribute a lot to increasing the Nakamoto coefficient of the chain, which we estimate to be quite low at this point, and extremely low when we started out. We get a lot of well-earned flak for having a whitelist of operators instead of a trust-minimized protocol, but the decision to use a whitelist has boons as well drawbacks that y’all have to consider. There’s no technical way for Lido to influence consensus - we don’t run validators. There’s also no possible way Lido can coerce over 20 independent, well-established, reputable, and dependable professional node operators to do anything untoward to the chain they run. At the moment, Lido is not a risk to the beacon chain.
Lido is a risk for its users and integrations (both in terms of implementation and governance risk), but that is a question between Lido, its users, and integrations. The day when informal working groups push Ethereum social consensus to actively govern applications on Ethereum will be the end of Ethereum we know and love.
Lido is a potential risk to the protocol: if the governance goes rogue when withdrawals and, thus, rotating validators is possible, it would be able (if the protocol remains as it is now) to rotate validators to a single malicious entity or a cartel of them; a less realistic attack vector would be to redirect all the new stake to the bad operators. We intend to cross out at least points 2 and 4 above by the time withdrawals are enabled, but of course, that’s an intent, not a given fact. You’d be in your right to not believe it’s definitely going to happen.
At this moment I am undecided if tactical limit/anti-incentive is a good idea or not; leaning it’s not a good idea, but I can see the arguments for Lido being very big but not ossified enough.
I also can see the possibility for Lido to self-limit based on community alignment, even if we do not believe it’s for the best. That said, I do not think there’s been a clear demonstration that the Ethereum community wants Lido to self-limit.
It’s visible now that some part of the Ethereum Foundation is in favor, as well as folks close to Rocketpool and Stakewise. There’s been very little said on the subject by the application and L2 developers, core devs, ETH holders and VCs in the ecosystem, Ethereum node operators, CEXes, and other important parts of the community. E.g. claiming that ETH holders would rather not exist in the timeline where Lido runs a lot of stake is premature. Anecdotical evidence - ETH holders don’t mind staking with Lido - could be interpreted the other way.
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Two main thoughts, and the second topic I feel much more strongly about:
(1)
Regarding selt-limiting, my weakly-held opinion is: any solution that requests protocols or products to handicap themselves or make their product worse is not really a solution. Blockchains cannot rely on altruistic and mission-aligned actors in order to maintain a healthy ecosystem.
Ethereum is fragile if it needs people to behave themselves to survive, rather than the incentives at L1 providing healthy coordination conditions. The cultural solution of “Vitalik tweeting to request market share reduction” will not work if the founders/builders transition away from being purpose-aligned to being more mercenary tradfi institutions.
That said, while I believe that a liquid staking solution could safely have a large portion (>50%) of staking market share, I also believe that Lido as an incentives/coordination layer protocol is not there yet and there are a lot of improvements to be made prior to that not being an undesirable reality post-merge. So I could see how limiting growth prior to the ability for users to exit (for example) is not an unreasonable suggestion in the circumstances.
In general, I don’t have a strongly-held opinion on this topic and think both sides have decent arguments.
(2)
There has been suggestions by observers to increase fees on Lido now to decrease market share. I strongly believe this is a mistake, knee-jerk reaction without proper considerations. Increasing fees on existing Lido stakers prior to their ability to exit is not just unprincipled, I believe it is perhaps even fraudulent.
Users staked with Lido with particular terms and agreements: one of those terms was a specific fee structure. Unilaterally changing those conditions on billions of dollars of user-owned funds should not even be under consideration until every single users has the ability to protest the fee by no longer being a user of Lido.
The ability to sell stETH on Curve is not sufficient. It does not allow every user to exit, and it could cause those that do want to exit to take ETH losses due to slippage.
Not only is it harmful to users, to which Lido has a primary responsibility, it is also a bad suggestion!
Since ETH cannot exit Lido prior to tx on eth2, modified fee-structures cannot reduce the amount of ETH in Lido… even at 100% annual fee!
Instead, it can only slow new growth by making it less attractive to future stakers. Hostage-taking increased revenue hurts existing users in order to dissuade new users. I believe this is unacceptable. When it becomes possible for users to unstake, suggestions like this could be entertained (given sufficient notification periods on major changes like fees).
Until then, if Lido wanted to dissuade new stake growth, it should do so in a way that does not betray existing users, for example, by adding a staking “entrance fee” (stake 1 eth, receive 0.95 stETH).
Any suggestions to unilaterally increase fees on all stETH holders should be rejected.
Lido has a responsibility to its users and cannot change the financial terms of the agreement until every user is able to safely exit the agreement in response.
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Im going to vote NO. I think that if LIDO self-regulated, it would be much easier for a centralized actor with risks of legal and regulatory pressure, to take control of a majority percentage of the staked ether.
An institutional staking solution like Alluvial, backed by Coinbase, could easily grow rapidly by ignoring the recommendations of not exceeding a percentage of the participation of the staked ether. A solution with economic priorities, without decentralized governance.
Once the regulation of the definition of $ETH is defined in the USA, it will be easy for institutions to deploy capital in $ETH and in institutional staking solutions. That capital can easily exceed the billions LIDO manages.
I believe in LIDO’s way of supporting on-chain development and ETH staking tokens that fuel the DEFI economy, although I have reservations with the leverage we see in AAVE or through INSTADAPP, which shouldn’t be supported; spending time and resources developing technologies, boosting ethereum developers and public goods.
For all that I reaffirm my negative vote, there is much to improve but LIDO can work with the ethereum community, the holders of stETH, the holders of LDO, to do it.
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Like @cobie my opinion is weakly held, but I lean towards exploring some mechanism for limiting Lido dominance.
As @djrtwo pointed out, Lido dominance is worrisome because of tail-risk scenarios. Not because of the normal operation of Lido validators or normal operations of the Lido DAO (both of whom have been excellent to date, including in the decision to have this discussion publicly).
Ethereum so far has implicitly (and possibly unintentionally) had soft rules around governance. This implies (as an example of tail-risk thinking) certain challenges with over-regulating or other adversarial attack. Having a DAO whose largest voters are legible on-chain able to meaningfully shift the validator composition of the chain might change this.
Again, my opinion is weakly held and that’s largely because no one really knows what these tail-risk scenarios (talking about ‘nation state attack’ is a little tired) are. But I lean towards conservatism.
Disclaimer: I hold both LDO and ETH
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I’ll also add that these social processes themselves are how ‘Ethereum governance’ has worked in the past, so I don’t think it’s out of sorts to use them for these decisions (i.e. in opposition to what those who think that ‘purely economic/technical’ mechanisms should govern these sorts of parameter changes).
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true, but not the case today!
i should say that i’m overall very pro-lido. this group has been very introspective about its position in the market and effect on the broader industry
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Any self limiting solution is a bad because it assumes and requires that eventually every other staking provider will do the same.
This is not to mention that it doesn’t make much sense for any protocol limit itself without any benefit. There’s a scenario where the ETH community regulates itself and LIDO has no alternative other than limiting itself at the risk of losing even a bigger market share but it’s not realistically gonna happen.
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Completely agree with this, was just keeping it simple. There are also considerations which go the other way, such as voter participation, so you don’t need 51% (30% or 20% might be sufficient). You might also be able to bribe some existing LDO holders and purchase their vote. Not sure how that all nets out though, which is why I was simplifying it to keep it more conceptual.
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This seems to insert a level of moral absolutism into something which is much more economically practical in nature.
If the fee is raised a little bit such that only a small % of users exit and the peg is still maintained, then how is any user worse off? As long as they can exit at 1 ETH per stETH, they are free to rotate into a different liquid staking pool, or stake the ETH themselves.
If the peg is not able to be maintained, then that’s a different story. But that’s why the fee, if raised, should be inched up very slowly.
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One really strong argument against self-limiting, at least in my view, is that it opens the door for someone else, like Coinbase, to take majority market share.
A common stated assumption is that CEXs would not self-limit. Is there any way we can test that assumption?
There might also be an opportunity for a conditional self-limiting. For example, the DAO could vote to self-limit at X% share as long as no one else exceeds X% share either, and if they do then it removes the self-limit.
As the market leader, Lido is in a position to set a precedent which others might be likely to adhere to.
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Social consensus on a divisive topic (and I think this thread demonstrates it’s not a one-sided one) is not a strong foundation; there’s more than a few ways a solution can power through it. E.g. shift the perception window on what’s considered acceptable (like Flashbots changed the perception of MEV); make some sort of sybil attack (e.g. the same big holder assures a silent controlling stake in multiple DAOs over time); make a meta-entity controlling most of the stake because it’s totally a different thing and doesn’t have the same risks. On a long enough timescale, commitments from the big players of today mean nothing and incentives mean everything.
Also, an interesting fact is that at this point in time there’s, to my understanding, 0 staking entities that committed to self-limit. Rocketpool and Stakewise teams did commit, but both are ostensibly DAOs and there haven’t been any votes or even discussions on governance forums of these entities. That is not to say they won’t, but to point out the question hasn’t been really settled (and that it won’t be resettled when there is a real choice for a dao between shooting for market domination and keeping their commitment). If Lido governance is not to be trusted, why should we trust other DAOs?
That said, the way I see the argument for limiting Lido and pushing hard for an oligopoly looks like this:
- Oligopoly market is better for Ethereum than power law market.
- Lido’s domination is circumstantial and not indicative of the market shape in less constrained environment; oligopoly is a natural equilibrium.
- A push to oligopoly now will make the market remain in a stable well-divided state forever
If all three are true, it doesn’t matter that social push on liquid staking providers equity is temporary or that not everyone agrees to it. I’m not sure I agree with an absolute form of 1 - I think both options can be positive or negative for Ethereum depending on how they end up on the side of governance risk and validator set management. I do not agree with 2 or 3 at all. Forces that made Lido that big become less pronounced when withdrawals are there, but they will remain in effect.
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You cannot exit for 1ETH per stETH until after withdrawals are implemented, which is at best 6-8 months away, which is what cobie means by “until every user has the ability to protest the fee by no longer being a user”.
Instituting this cap in the mean time will drive the ETH/stETH exchange rate down since it will only exacerbate selling pressure (and reduces demand, since you’re basically reducing the EV of the purchase). Your suggested mechanism doesn’t work because there is even less reason to buy discounted stETH than right now since it will have even less APR attached to it – especially because selling stETH doesn’t actually lower Lido’s share, as it’s necessary that a) sizeable staking deposits are flow into the Beacon Chain and b) are going to somewhere not-Lido. So, in conditions where deposits are generally low and people are already exiting liquid staking positions, this will create even more stress on the exchange rate.
So not only is it morally dubious, it’s also economically both unlikely to work and impractical that this mechanism can even work pre-withdrawals.
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Yes, that is the assumption. It has more or less been true so far, as staking deposits continue to flow in.
Regarding impact of a higher fee vs how many people would exit and how much it would reduce new adds, that really just comes down to the price elasticity, which we don’t know and are just speculating.
But the mechanism I proposed works regardless of what that elasticity is. If you only raise the fee by a very slight amount, that will have some impact on exits and new adds. If it doesn’t have enough impact, you raise it more. If it has enough impact, you stop. If it has too much impact, you undo it, or partially undo it. No matter what, there’s some value X for a fee increase which gets you to an equilibrium that makes it so new adds offset the exits and you mint no new stETH but also don’t depeg (since the demand for new stETH picks up the slack on the secondary markets).
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For #1, a big part of it depends on who the other oligopoly players are. If three CEXs each end up with 22% share, that oligopoly is less desirable than Lido having 66%. But if the other oligopolies are liquid staking pools, each with their own operator set, it’s a better outcome than having it all be in one. Obviously also depends on which staking pools, as they’re not equal in governance and validator sets.
For #2, I do believe that the large liquidity pool requirements pre-withdrawal are what’s causing the market to be winner-take-most at the moment. Without that, I don’t see strong network effects. Anyone can start a liquid staking service and the peg will be maintained by arbitrage. The barriers to entry aren’t very high, nor are the network effects.
For #3, I agree with you. This is a very nascent market undergoing rapid change; I would not expect market shares be stable over the next couple of years regardless of their starting position today. Besides withdrawals, DVT will be especially transformative. As we move more in the direction of permissionless operators, and operating itself becomes easier (better UI, documentation, etc), it will become more commoditized. Whoever can implement DVT the best and fastest will have a lead on the resulting lower costs, creating an opportunity for market share gains.
That being said, there’s a timing element to all of this. The problem is that Lido’s market share is already high and rising, the merge is coming in August, and Lido still has a ways to go in terms of governance and expanding its validator set. Saying ‘Let us keep gaining more share now and we promise we’ll improve these things later’ doesn’t exactly sit well.
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Will be voting against self-limiting Lido.
For those on the fence, I would encourage you to consider how early we are. Self-limiting Lido at this early stage could leave the door open to another (more centralized, or even malicious) player racing past Lido.
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