As Lido Breaches 33% of All ETH Staked, the Drama Perfectly Highlights the Dichotomy that Crypto Needs to Face: Business vs Decentralization Ethos

Yesterday, Lido breached 33% of all ETH staked and it sparked the debate of whether it should self limit itself to a hard cap of 33% ETH stake for the health and decentralization of the network.

Why is 33% important? Any % greater than 33%, validators now have the ability to prevent the chain from finalizing without controlling actions of other validators, as well as other issues, effectively creating a cartelization of blockspace.

This isn’t the first time. Last year, the DAO brought this topic to vote and the results are what you might expect.

The top 3 accounts that voted against Lido having a hard cap of 33% ETH stake outweighed every other vote in total.

https://snapshot.org/#/lido-snapshot.eth/proposal/0x10abedcc563b66b1adee60825e78c387105110fa4a1e7354ab57bc9cc1e675c2

But here’s the issue; No reputable business would willingly decentralize itself. Period.

“But Lido isn’t a business; it’s a protocol.”

This is true, but it damn sure operates like a business.

Ultimately, Lido offers services in exchange for a fee.

Its “stakeholders” comprise both LDO holders and the group of validators that support the protocol.

For Lido to truly embody more “decentralization,” it must act in a way that contradicts the fundamental interests of the DAO and its token holders.

No “entity” (be it a company, protocol, or any service-provider for that matter) will naturally restrict its growth without external pressures.

In the traditional business world, this is the role of regulators.

Any business that:

• renders services • generates fees • has stakeholders 

will eventually seek to accumulate as much influence as possible.

When you urge Lido to self-impose limits, you’re essentially asking those with a vested interest in maximizing profits and power to voluntarily restrain themselves. This, as history shows, rarely occurs.

But is it within the rights of the Ethereum community to express concerns and perhaps even consider a “fork” or any other measures to restrict Lido?

Yes.

Does Lido’s dominance mirror a flaw of Ethereum’s staking incentives design?

Yes.

Luckily, there is much being done about this and a lot of smart people trying to come up with a solution.

Like EIP-7514, which is a proposal to slow down max validator growth rate by capping the epoch churn limit, a parameter used to control the activation and exit of Ethereum validators. But this is only temporary bandaid to buy more time for the Ethereum research community to come up with a more permanent solution to the problem.

And another rather controversial take by Vitalik last year, “we should legitimize price gouging by top stake pool providers. Like, if a stake pool controls > 15%, it should be accepted and even expected for the pool to keep increasing its fee rate until it goes back below 15%.”

https://x.com/vitalikbuterin/status/1525301234516652032?s=46&t=GpWP0EdHqBeMteYaGqJP1g

The argument to this was that staking capital may flow into centralized exchanges, which is worse off for Ethereum from a node operator diversity perspective.

And then there’s Eigenlayer. Eigenlayer’s AVS will likely have the option to choose from validators from the pooled validator list. AVS protocols can choose to incentivise LSD protocols with better node decentralization options such as RocketPool’s rETH and Frax Finance’s frxETH v2.

In my opinion, Ethereum needs to implement easier, cheaper native liquid staking. Change the minimum 32 ETH to no minimum and make it easy enough for anybody to stake if they choose to do so. It’s the only way to truly solve this issue.

What do you think?