Centralized Risks of Lido: Reality or Hype?

After Ethereum transitioned from POW to POS, Lido, as one of the biggest beneficiaries, has seen rapid growth in its market share, attracting widespread attention from the community. Some are concerned that Lido may threaten Ethereum's decentralization, while others believe this concern is merely a marketing tactic by competitors. This article will objectively analyze Lido's market position and its potential impact on the Ethereum network.

The Rise of Lido and the Concerns It Has Raised

Lido is a project that addresses the liquidity issues of staking on PoS blockchains. Through liquid staking, users can obtain tokenized staking receipts, thereby increasing the utilization of their funds. Since its launch in 2020, Lido has become a major staking platform for several public chains, including Ethereum. As of now, Lido has staked nearly 9 million ETH, accounting for 31.8% of the market share.

This high percentage has raised concerns among various parties, including the founder of Ethereum. Researchers have pointed out that Lido actually controls over 38% of the validator nodes, far exceeding the reasonable range for a single entity. An Ethereum Foundation researcher has also emphasized the risks that Lido's more than 90% share in the liquid staking market may bring, including validator penalties, governance attacks, and smart contract vulnerabilities.

Practical Assessment of Lido's Centralization Risks

Despite Lido's market share nearing the 33% threshold, its centralization risk may be overstated:

1. Differences in data transparency: Lido, as an on-chain protocol, has its data fully open to the public, while lower-ranked centralized exchanges may choose to disclose information selectively.

2. Risk Diversification: Lido allocates funds to 29 operators for staking, limiting the risk borne by each individual operator.

3. Economic Motivation: Node operators have no incentive to act maliciously; otherwise, they will face penalties and lose their sources of income.

4. Node Diversity: Lido focuses on diversity when selecting operators to avoid centralization.

5. Social Layer Guarantee: Even in extreme situations, the community can remove malicious nodes through social consensus.

Root Causes of Lido Issues and Responses

Lido's high market share reflects the centralized trend that exists generally after Ethereum's transition to POS. Compared to centralized exchanges, Lido, as a decentralized organization, actually has certain advantages. Solving this issue requires joint efforts from multiple parties:

1. Ecosystem Adjustment: Support more LSD tokens as collateral to diversify the market demand for stETH.

2. Lido's self-improvement:

   • Consider self-limiting market share in the short term
   • Improve the level of internal decentralization
   • Increase the number and diversity of node operators
   • Establish a more comprehensive risk management mechanism
   • Implement an automatic fee adjustment mechanism

3. Top-level design: Explore solutions to balance the advantages of POS and the risks of centralization.

Conclusion

The controversy sparked by Lido reminds us of the need to comprehensively consider the development of decentralized ecosystems. Simply restricting Lido may lead to centralized exchanges monopolizing the staking market, which is equally detrimental to Ethereum's decentralization goals. In the future, a balance must be sought between ensuring network security, promoting market competition, and upholding the ideals of decentralization.