Scribbler Logo

    You have 4 summaries left

    Bankless

    In Defense of Lido With Hasu

    Mon Aug 07 2023
    EthereumLidoStakingDecentralizationDual Governance

    Description

    This episode explores concerns about Lido's dominance in Ethereum staking and its potential impact on decentralization. It delves into the cultural clash between idealists and pragmatists in Ethereum and discusses the need for a balance between ideals and network effects. The episode also addresses controversies surrounding Lido's size and influence on validators. It examines the risks of concentration and chain finalization, as well as the challenges of protocol control and governance. The concept of dual governance and future visions for Lido are explored. The chapter concludes with insights on customization, liquid staking, and the importance of maintaining decentralization in Ethereum.

    Insights

    Lido's dominance raises concerns about Ethereum's decentralization

    With over 30% of ETH staked, Lido's size poses risks and challenges to Ethereum's decentralization.

    Cultural clash between idealists and pragmatists in Ethereum

    There is a cultural clash in Ethereum between idealists and pragmatists, discussing the right balance between ideals and network effects.

    Risks of concentration and chain finalization

    Accruing a significant portion of ETH in one place gives influence over the protocol and can prevent chain finalization.

    Challenges of protocol control and governance

    The risk of an attacker manipulating Lido's smart contract and the influence of on-chain governance are major concerns.

    Dual governance as a solution

    Dual governance, splitting responsibilities between LDO token holders and Stakers, aims to address the problem of on-chain governance in Lido and Ethereum.

    Power dynamics and incentives in Lido governance

    The power that Lido DAO has over node operators is primarily related to income access and distribution of stake rewards.

    Decentralization challenges and future vision

    Creating a better market for stakers and preventing monopoly behavior are key goals for LIDO DAO. The future vision includes Lidowv2 with a staking router and permissionless modules.

    Customization and challenges in Ethereum

    Modules in LIDO allow customization of economics, but dealing with large applications built on Ethereum remains a challenge.

    Liquid staking and network effects

    Liquid staking is the most dominant form of staking, and LIDO must continue growing to maintain dominance. The community should pressure LIDO to decentralize and roll out permissionless modules.

    Maintaining decentralization in Ethereum

    Ethereum should stay true to its values and make hard choices to achieve decentralization and security guarantees in the staking protocol.

    Chapters

    1. Lido's Dominance and Decentralization Concerns
    2. Mantle Treasury and Risks of Concentration
    3. Risks of Concentration and Chain Finalization
    4. Protocol Control and Governance Concerns
    5. Governance Challenges and Node Operator Relationships
    6. Dual Governance and Future Vision
    7. Power Dynamics and Incentives in Lido Governance
    8. Decentralization and Future Challenges
    9. Liquid Staking and Customization
    10. Customization and Challenges in Ethereum
    11. Liquid Staking and Network Effects
    12. Decentralization and Ethereum's Path Forward
    13. Conclusion and Key Takeaways
    Summary
    Transcript

    Lido's Dominance and Decentralization Concerns

    00:00 - 06:32

    • Lido currently holds over 30% of ETH staked, raising concerns about Ethereum's decentralization.
    • The episode explores the potential risks of an entity controlling a significant portion of Ethereum's stake.
    • The conversation also delves into the state of Lido and its path towards decentralization.
    • There is a cultural clash in Ethereum between idealists and pragmatists, discussing the right balance between ideals and network effects.
    • The episode addresses whether Lido deserves its bad reputation or if it is unfair criticism.
    • The need for this episode arises from conflicts between Lido and other staking as a service organizations.
    • The conversation aims to unpack the real concerns and narratives surrounding Lido.

    Mantle Treasury and Risks of Concentration

    06:08 - 12:51

    • Mantle Treasury is one of the biggest DAO-owned Treasuries, seeding projects in the web3 space for Mantle.
    • Hazu is an independent researcher in crypto and a strategic advisor to LIDO organization.
    • LIDO is a staking as a service organization holding over 31% of all ETH Staked in Ethereum.
    • There are perceived risks and controversies surrounding LIDO's size and impact on validators.
    • Stake-Div, the asset issued by LIDO, is becoming increasingly used compared to Ethereum, raising systemic concerns.
    • The debate revolves around which free market service provider will provide the dominant version of Staked Ether into DeFi and the Ethereum economy.
    • Any chain with proof of stake faces similar challenges regarding staking tokens' fungibility and usability across other applications.
    • The market demand for staking ETH creates centralization and network effects favoring entities like LIDO.
    • This resembles a 'too big to fail' argument where concentration of assets becomes a concern.

    Risks of Concentration and Chain Finalization

    12:27 - 19:18

    • The concentration of ETH in one place resembles the problem Ethereum faced with a lot of ether being concentrated.
    • The Ethereum community had a security incident with the DAO project, which left scar tissue and led to guidelines for future projects.
    • ICO boom resulted in unfairness and negative effects due to supply not matching demand.
    • Enforcing rules on the social layer is difficult as the protocol layer does not listen to them.
    • Too much ETH being pulled in one place has played out in other cases like centralized exchanges or MakerDAO.
    • Lido currently holds around 30% of all staked ETH, which poses risks if something bad were to happen to their smart contracts.
    • Accruing so much ETH in one place gives influence over the protocol and can prevent chain finalization.
    • Consensus protocols rely on honest behavior and incentives for it to occur.
    • Stakers are encouraged to hold stake in the system itself, assuming their ETH would become worthless if the system gets attacked.

    Protocol Control and Governance Concerns

    19:00 - 25:43

    • Proof of stake works by forcing stakers to hold equity or stake in the system, making their own tokens worthless if the system is attacked.
    • Slashing is an additional layer of security in proof of stake, but some staking protocols don't have slashing.
    • Stake distribution in LIDO involves multiple node operators and staking modules, making it difficult for the DAO to control them.
    • LIDO can only limit stake distribution to node operators who don't meet its requirements, but cannot un-stake them programmatically.
    • The risk of an attacker coming into governance from outside and manipulating LIDO's smart contract is a major concern.
    • Thresholds in proof of stake determine protocol control and influence over finality. With 33% control, finality can be influenced; with 66%, one entity controls Ethereum.
    • Ethereum's off-chain governance philosophy can be bypassed if a staking entity like LIDO has more than 33% control.
    • LIDO's on-chain governance with the LDO token could override Ethereum's off-chain governance philosophy if it has over 33% control.

    Governance Challenges and Node Operator Relationships

    25:17 - 32:06

    • If Lido had over 33% and currently has 31%, the off-chain governance philosophy of Ethereum becomes ignored
    • Lido with on-chain governance could govern some rules of the protocol
    • The concrete risk is that Lido DAO makes a governance decision to destroy their own livelihood and the technical theorem
    • Coordination among the 29 node operators is necessary for any major decision by Lido governance
    • LIDO is a thin middleware layer that distributes rewards to node operators and users
    • Node operators are not compelled to follow LIDO's policies and can exit if they choose
    • LIDO has no strong way to punish non-compliant node operators
    • MEV policy was implemented by LIDO to address MEV extraction concerns
    • LIDO ensured that node operators cannot break the reward distribution split
    • LIDO supported proposal builder separation and mandated MEV Boost for its node operators

    Dual Governance and Future Vision

    38:06 - 45:03

    • Dow has developed a concept called dual governance, splitting responsibilities between LDO token holders and Stakers
    • Similar bicameral governance systems exist in other protocols like Optimism and Arbitrum
    • Dual governance introduces checks and balances to make the system more robust
    • Lido Staked ETH holders have the power to veto proposals that go against their wishes
    • The feature of dual governance is not yet live but has been in development for nine months
    • It aims to address the problem of on-chain governance in Lido and Ethereum
    • While it is a step in the right direction, it is still considered a Band-Aid solution
    • Staked ETH holders need to monitor Lido governance, which may be burdensome for those who want a hold-and-ignore product

    Power Dynamics and Incentives in Lido Governance

    44:33 - 51:48

    • Voting can go both up and down in Lido governance.
    • The mechanism of Lido governance is still under development and may change.
    • Lido governance has a veto power to prevent oppressive votes.
    • If the protective barrier of staked ether veto gets broken, coercion and defection incentives between Lido governance and node operators need to be discussed.
    • Node operators who want to leave would have to exit the DAO or the protocol programmatically.
    • The DAO can exit a node operator's stake as a way to hold them accountable for misbehavior.
    • The power that Lido DAO has over node operators is the income stream from staking revenue.
    • Incentives for node operators to perform well will become especially important as the number of different node operators increases in the future vision of Lido having over 5,000 node operators.
    • The power that governance has over node operators is primarily related to income access and distribution of stake rewards.
    • There are no other variables affecting the relationship between Lido governance and node operators.

    Decentralization and Future Challenges

    51:18 - 57:44

    • In a hypothetical scenario, there could be a fork of Lido called Lido Classic, which would encourage the community to exit from Lido and stick with them.
    • Forking the code and creating Lido Classic would require stakers to withdraw their funds from Lido and redeposit them into Lido Classic.
    • Creating Lido Classic would essentially compete with other staking-as-a-service startups.
    • The goal of the LIDO DAO is to prevent monopoly behavior and create a better market for stakers.
    • LIDO aims to have 5,000 node operators in the future through its new version called Lidowv2.
    • Lidowv2 enables withdrawals from the beacon chain and introduces a new architecture called the staking router.
    • The permission set of 29 node operators is curated by a committee called NOM (Node Operator Management Committee).
    • The staking router allows for different modules representing different staking strategies or node operators to coexist.
    • In the future, there could be many modules approved by the DAO that distribute funds across different strategies or operators.
    • Possible modules include permissioned module for professional node operators and permissionless module for anyone to stake with a bond requirement.

    Liquid Staking and Customization

    57:23 - 1:03:40

    • Rocketpool is an incredible project, but the use of RPL as collateral may not be the best choice for efficiency.
    • LIDO could improve by only requiring ETH as collateral for node operation.
    • There are three types of modules in Rocketpool: permission pool, permissionless pool, and a blended version of both.
    • The blended module combines professional and auto-paders to ensure uptime and performance.
    • DVT (distributed validator technology) allows multiple parties to operate a single validator, providing a balance of power between professionals and hobbyists.
    • LIDO V2 follows a design pattern of pushing complexity to the edge, keeping the core simple and secure.
    • LIDO has the potential to become a platform where other staking providers can build on top of it.
    • Modules in LIDO allow customization of economics, such as setting different fees based on professionalism or size.

    Customization and Challenges in Ethereum

    1:03:23 - 1:10:13

    • Different modules in LIDO can set their own fees for staking services
    • Staking as a service organizations can issue their own tokens
    • Modules can have complete freedom in design and even introduce governance
    • LIDO aims to become a platform and address criticisms of centralization
    • Ethereum community wants multiple staking protocols without on-chain influence
    • Dealing with large applications built on Ethereum is a challenge
    • Liquid staking has three parts: dividing capital and labor, delegation, and incentives

    Liquid Staking and Network Effects

    1:09:43 - 1:16:34

    • Only 6% of stakeholders in the network are solo operators, and this number may even be lower.
    • Liquid staking is the most dominant form of staking and will eventually crowd out other forms.
    • Liquid staking tokens compete as money, similar to Ether.
    • Industries with network effects tend to have a winner-take-most dynamic.
    • Ethereum faces challenges in dealing with projects that become too big.
    • LIDO must continue growing to maintain dominance, as there is no middle ground between being big and being nothing.
    • The community should pressure LIDO to decentralize and roll out permissionless modules.

    Decentralization and Ethereum's Path Forward

    1:16:14 - 1:23:12

    • Apply pressure to LIDO to decentralize its stack
    • Roll out permissionless modules and governance
    • Maintain a zealous core in order for a blockchain to stay decentralized
    • Contrast the social force with the factory-type nature of Moloch trapping
    • Bitcoin community's ferociousness couldn't prevent centralization in mining
    • Ethereum should not compete with Bitcoin on ferociousness, but stay true to its values
    • Ethereum is accelerationist and pragmatic in solving problems
    • Keep Ethereum decentralized while being pragmatic about market forces
    • Make hard choices to achieve decentralization and security guarantees in staking protocol
    • LIDO has been seen as centralized by some Ethereum leaders, but they have a different view

    Conclusion and Key Takeaways

    1:22:55 - 1:27:46

    • LIDO has a different view about how things will play out in Ethereum.
    • Criticism of LIDO is important and helps improve the project.
    • Staking router, dual governance, smart contract filing, programmable exits are not yet implemented in LIDO.
    • Contributions and collaboration are encouraged to make progress faster.
    • Discourse and conversation are core values of the Ethereum community.
    • The meta question for Ethereum is whether it can remain decentralized.
    • Sticking to the values that make Ethereum unique is crucial for maintaining decentralization.
    • Building systems that win in the free market while protecting decentralization is the way to succeed.
    • Hasu hosts a podcast called Uncommon Core with John Chabunau, discussing technical topics related to infrastructure in Ethereum.
    • None of the information provided should be considered financial advice.
    1