Lido's Centralized Risk Assessment: Overly Concerned or a Real Threat?

After Ethereum transitioned from POW to POS, Lido emerged as one of the biggest beneficiaries, and its rapidly growing market share has sparked extensive discussion within the Ethereum community. The debate over its potential threats reached a peak, especially when Lido rejected "self-restriction" and planned further expansion.

Some people worry that the rise of Lido may damage the decentralized nature of Ethereum, leading to node centralization and threatening network security. Others believe that this concern is more of a marketing tactic from competitors, aimed at slowing down Lido's growth. Regardless of the viewpoint held, there are reasons for each.

This article will conduct an in-depth analysis of Lido's market share and centralization risks, objectively assessing its impact on Ethereum.

Lido's Rapid Rise Raises Concerns

Lido is a project that addresses the liquidity issue of staking tokens in PoS blockchains. It allows users to obtain tokenized versions of their deposited funds through liquid staking, thereby increasing the flexibility of staking.

Since its launch in 2020, Lido has become the preferred liquid staking platform for several PoS public chains, including Ethereum 2.0. Compared to the traditional staking threshold of 32 ETH, Lido allows users to participate with any amount, significantly lowering the barrier to entry. However, with Lido's rapid growth, concerns about its potential threat to Ethereum's decentralization have begun to arise. Currently, Lido has staked over 8.8 million ETH, accounting for 31.8% of the market share.

This high market share has attracted attention from various parties, including the founder of Ethereum. Some believe that Lido controls over 38% of the validators, which may lead to centralization of Ethereum. Researchers have also pointed out that Lido faces risks such as validator slashing, governance attacks, and smart contract vulnerabilities. Therefore, addressing the issue of Lido's excessive market share has become crucial.

The Centralized Risks of Lido May Be Exaggerated

Although Lido is approaching the 33% "red line", its centralization risk may be exaggerated.

First of all, Lido, as an on-chain protocol, has its data fully transparent. In contrast, lower-ranked centralized exchanges may not disclose some unfavorable data, so the actual market share of Lido may be inflated.

Secondly, Lido allocates funds to 29 operators for staking, spreading the risk. The operators also lack the motive to act maliciously, as it would lead to a loss of income.

The biggest risk may be the mechanism of Lido's designated node operators, which could lead to collusion among large stakeholders. However, Lido has strict standards when selecting operators to ensure diversity and avoid centralization. Even if problems arise, the social layer can intervene to address them.

Lido Reflects a Broader Centralization Issue

The situation with Lido can be seen as a manifestation of the centralization issue in Ethereum, rather than the root cause. In fact, similar situations may occur in other projects. In community governance, members may be more inclined to choose directions that benefit themselves rather than the overall ecosystem.

Lido rejected centralized restrictions through decentralized voting, reflecting that complete decentralization may be uncontrollable.

In fact, concerns about centralization trends have emerged after Ethereum transitioned to POS. Large stakeholders may dominate transaction validation, leading to a concentration of power. In this regard, the threat from centralized exchanges may be greater, as they are more susceptible to government pressure as a single entity.

The issue with Lido provides an opportunity to discuss the centralization of Ethereum, necessitating a balance between the advantages of PoS and the risks of centralization.

Possible Solutions to Lido Issues

The top designers of Ethereum have begun to pay attention to this issue. From the perspective of ecological robustness, limiting Lido's excessively high market share has become a goal.

Some suggestions include: supporting non-mainstream liquid staking tokens as collateral to diversify demand; Lido self-limiting market share; improving internal decentralization; increasing the number of node operators; establishing system safeguards, etc.

In addition, there is a proposal to automatically increase user fees when market share exceeds the target, to maintain a reasonable scale.

Through these measures, Lido can alleviate its impact on the decentralization of Ethereum while protecting the stability and security of the entire ecosystem.

Conclusion

The controversy surrounding Lido reflects a deeper issue: how to seek a balance between decentralized protocols and centralized entities. We must be vigilant against the risks brought by excessive centralization, while also recognizing the role of decentralized protocols like Lido in preventing the monopoly of centralized exchanges. In the future, it is necessary to find a balance between ensuring the long-term development of the ecosystem and maintaining fair market competition.