Is the centralization risk of Lido exaggerated?

After Ethereum transitioned from POW to POS, Lido emerged as one of the biggest beneficiaries, and its rapid growth in market share has raised concerns within the community. Some believe that Lido may threaten Ethereum's decentralization, while others argue that these concerns are exaggerated. This article will delve into Lido's market share and centralization risks, objectively assessing its impact on Ethereum.

Lido Dominates Staking Market Raises Concerns

Lido is a project that addresses the liquidity problem of staking in PoS blockchains. It allows users to stake any amount, lowering the barrier to entry. Currently, Lido has staked over 8.8 million ETH, accounting for 31.8% of the market share.

This high share has drawn the attention of Ethereum's founders. It has been pointed out that Lido controls over 38% of the validators, far exceeding the proportion that a single entity should have. Some researchers emphasize that Lido's control over a large amount of staked ETH may face risks such as validator slashing and governance attacks.

The Centralized Risks of Lido May Be Exaggerated

Although Lido's market share is approaching the 33% security threshold, its centralization risk may be overstated:

1. Data Transparency: Lido, as an on-chain protocol, has completely open data. However, the data of leading centralized exchanges may not be fully transparent.

2. Risk Diversification: Lido allocates funds to 29 operators for staking, which relatively disperses the risk.

3. Lack of malicious intent: Node operators who engage in malicious actions will face severe penalties, lose their sources of income, and lack economic incentives.

4. Strict Screening: Lido has strict standards for node operators to ensure diversity and avoid centralization.

5. Social layer intervention: Even in extreme situations, the social layer can intervene to remove malicious nodes.

Lido Reflects the Centralization Trend of Ethereum

The situation with Lido can be seen as a manifestation of the centralization issues in Ethereum. In fact, after Ethereum transitioned to POS, the trend of centralization has become apparent, with large stakeholders potentially dominating transaction validation.

In comparison, centralized exchanges may pose a greater threat to the decentralization of Ethereum. If they dominate a large portion of the staking market, it could lead to regulatory pressure and affect Ethereum's independence.

The Lido issue provides an opportunity to explore the centralization of Ethereum, requiring a balance between the advantages of POS and the risks of centralization.

Ideas for Solving Lido Issues

1. Support for other liquid staking tokens to diversify market share.

2. Lido self-limits its market share.

3. Improve the degree of internal decentralization.

4. Prevent price fraud in the system.

5. Increase the number of node operators.

6. Build system railings.

7. Automatically increase user fees when market share exceeds limits.

Conclusion

The controversy surrounding Lido reflects a broader issue - how to strike a balance between decentralized protocols and centralized entities. We need to take into account multiple aspects of the market, ensuring the long-term development of the ecosystem while also maintaining fair competition in the market. This requires the joint efforts and wisdom of all parties in the community.