Recent comments from Danny Ryan, often referred to as the mastermind of the beacon chain, have sent ripples through the ethereum community. in a sincere interviewRyan criticized Lido and similar protocols, claiming that they pose a systemic threat to ethereum‘s core values and its core consensus mechanisms.
The crux of Ryan’s concern revolves around Lido’s growth. Lido has now accumulated almost a third of all eth staked. In the world of consensus mechanisms, exceeding thresholds such as one-third or one-half gives the participant significant influence, potentially allowing them to fatally alter the consensus. This not only means a potential risk of centralization; could erode ethereum‘s value proposition as a decentralized platform.
Why Lido is a “systemic threat” to ethereum
Ryan shared a poignant reflection on the broader implications of Lido’s rampant growth: “Lido or some similar protocol that short-circuits the economy and essentially forms a cartel, has its own governance token owned by a group of venture capitalists, is a threat.” systemic for ethereum. .” He went on to address the community’s inaction, suggesting that their indifference to Lido’s expansion was a worrying sign of ethereum‘s commitment to decentralization.
Furthermore, he commented that “most token allocations these days are VCs controlled by a handful of people (…) one instance of shit on the chain.” Ryan further questioned the sustainability of such centralized governance, pointing out the risks associated with regulators targeting influential individuals or entities.
Because it is just a corporatization, a centralization and a systemic threat. What happens when a regulator realizes that 3 people control the vote? I have 3 doors to knock on, easy.
While ethereum is “not perfect,” a shutdown of Lido by regulators could lead to serious problems for the network. “We will have a problem with the liveness of the network. Since life is the goal, not necessarily chain availability, some decisions could be made, but they will not be definitive economic decisions,” Ryan said.
If Lido persists on its trajectory without imposing any limits, the ethereum community may resort to extreme measures. This could range from socially excluding Lido, such as creating a soft fork where non-Lido validators discard Lido certifications, leading to potential loss of eth due to idle leaks.
In extreme cases, a hard fork to sell Lido assets could be on the table, a move that Ryan indicates would be catastrophic not only for Lido stakeholders but for the entire ethereum ecosystem. This is because it could instigate what could best be described as a blockchain “civil war.”
Why LSD should be a non-profit organization
Ryan’s words gain more weight when contextualized with his recent ethereum.org/@djrtwo/risks-of-lsd” target=”_blank” rel=”noopener nofollow”>article. The post titled “Liquid Staking Derivatives Cannot Safely Exceed Consensus Thresholds” delves into the dangers of liquid staking derivatives (LSDs) like Lido. Warns against cartelization of the block space when such platforms exceed critical consensus thresholds.
The article indicates that these platforms, while not inherently flawed, face inherent risks when they exceed such consensus limits. Clarifies possible consequences, such as outsized profits compared to unpooled capital, due to coordinated MEV mining, block time manipulation, and censorship.
Additionally, Ryan’s article presents a binary choice for LSD protocols regarding their governance structure. They either allow governance to decide on node operators, introducing significant risks including cartel behavior, or they resort to economic and reputation-based criteria, which could inadvertently lead to automated cartelization.
From Ryan’s perspective, staked eth does not necessarily equate to an ethereum user. Therefore, if LSD protocols were to allow their eth stakeholders to have a say in their governance, it would not necessarily represent the broader ethereum user base.
Ryan’s comments, while alarming, come from a genuine concern for the long-term health of ethereum. His call to action is clear: LSD products like Lido should self-impose limits for their own good, and those allocating capital should recognize the risks and ideally avoid LSDs with more than 25% of total Ether staked.
Ryan is not the first to point out the potential impact of Lido dominance. In August, X user Superphiz.eth warned that the protocol should not be allowed to gain more market share. As such, the platform has been asked to impose a self-limiting rule.
However, stakeholders in the protocol, which currently dominates 32.4% of the liquid betting market, have already voted against a self-limiting rule by an overwhelming 99.81%.
At the time of this publication, eth was trading at $1,614.
Featured image from Shutterstock, chart from TradingView.com
