Detailed Explanation of the Lido V2 Proposal: Allowing Unstaking and Introducing a New Architecture for Further Decentralization

Original Title: 《 Introducing Lido V2---Next Step In Decentralization 》

Compiled by: DeFi Dao

On February 7, Lido officially released the Lido V2 proposal, the largest upgrade of the protocol to date, which will allow stakers to withdraw their ETH from Lido, while the new modular architecture design brought by the Staking Router will further decentralize the Lido validator ecosystem.

The technical contributors of the Lido protocol proposed the Lido V2 proposal—this is the largest upgrade of the Lido protocol to date and a step towards further decentralization.

The two main focuses of this upgrade are:

Staking Router: Thanks to the new modular architecture design, anyone can develop entry points for new node operators, from independent stakers to DAOs and distributed validator technology (DVT) clusters. They will collaboratively create a more diverse validator ecosystem.

Withdrawals: This comprehensive upgrade of the Ethereum Lido protocol will allow stETH holders to withdraw ETH from Lido at a 1:1 ratio, achieving a key milestone for truly entering and exiting the Ethereum staking ecosystem.

Lido's goal is to provide users with an alternative to centralized staking platforms (such as exchanges) while eliminating the technical and financial challenges of running separate nodes. From start to finish, the Lido protocol has consistently adhered to providing the highest standards of security and usability for its users.

The proposal aims to promote a more inclusive, open, and transparent platform while building on our core mission to make staking simple, as safe as possible, and to maintain Ethereum's decentralization and censorship resistance.

Next Major Upgrade

In the coming months, Ethereum will complete the Shanghai/Cappella hard fork upgrade. This upgrade will enable all Ethereum stakers to withdraw since the launch of the beacon chain.

The implementation of withdrawals achieves Lido's core goal of allowing users to freely stake and unstake. Given this freedom, the market will shine on a platform that provides the best experience, security record, and broader composability within the DeFi ecosystem.

The emergence of the Staking Router and the modular validator cluster infrastructure will facilitate the development of the entire Lido on Ethereum as well as contributions from external third parties.

The Lido protocol is an early adopter of liquid staking, initially using the BLS-based 0x00 withdrawal credential (WC). Once the smart contract-based WC became available, the Lido protocol immediately switched to the more secure 0x01 WC. Currently, a small portion of validators (about 12%) are still using the 0x00 WC managed by a 6-of-11 threshold scheme.

To mitigate the risks associated with distributed custodians, these credentials can be rotated to smart contract-based credentials through a ceremony. In this ceremony, participants will sign a rotation message that will be broadcast to the consensus layer network.

The implementation of withdrawals, combined with the Staking Router proposal, will help increase the decentralization of the network while fostering a healthier Lido protocol and achieving the long-awaited ability to freely stake and unstake (withdraw), reinforcing stETH as the most composable and useful asset on Ethereum.

What is the Staking Router?

The Staking Router is a significant protocol upgrade that moves the operator registration center to a more modular and composable architecture.

The Staking Router will serve as the core of Lido's vision: a platform that allows stakers, developers, and node operators to collaborate seamlessly to drive the future of decentralized Ethereum.

Ethereum should be a reliable and neutral home for applications and their users. The mission of Ethereum Lido is to provide a secure and accessible staking platform while contributing to the overall decentralization of Ethereum.

Lido is firmly committed to further diversifying its operator and validator set, reducing the risk of downtime or censorship while maintaining network performance and neutrality.

Overview

The Staking Router is a controller contract that allows Lido to evolve into a scalable protocol through modular infrastructure. This will work by essentially treating various modules as pools of validators that can serve as potential supplies for the protocol. Each module will be responsible for managing the internal operator registry, storing validator keys, and distributing stakes and rewards among the operators participating in that module.

Each module can include various types of node operators, from community stakeholders to professional or emerging staking organizations, to DAOs, which can operate validators independently or collaboratively through infrastructures like DVT. Additionally, node operators will be able to participate through multiple modules. Beyond product functionality, it can also allow keys to be stored on L2 or off-chain, thereby reducing protocol costs and increasing the potential number of node operators.

The modular architecture will facilitate faster experimentation with various node operator configurations. This will reduce some technical barriers while accelerating the iterative process of scaling the node operator set.

The Staking Router is ready to benefit various stakeholders using Lido, including:

Stakers: They benefit from a more diverse and secure set of node operators, as their deposits will be distributed across more independent entities, thereby reducing the risk of network downtime and enhancing Ethereum's resilience.

Node Operators: With the new modules, other types of node operators, such as independent stakers, small groups, DAOs, and professional node operators, will be able to increase their pathways to participate in the Lido protocol.

Developers: Users will be able to propose and implement modules using different combinations of node operators with various competitive features (such as coverage options and fee structures) and apply to join the module set of the Staking Router.

The Staking Router architecturally shifts the Lido protocol towards an aggregator strategy, incorporating a more diverse validator set and providing possibilities for greater overall flexibility across different approaches and technologies within the protocol.

Furthermore, the Staking Router will allow individual modules (and their respective subsets of validators) to operate with custom parameters, such as fees or collateral requirements, thereby increasing flexibility among the validator sets.

Future Directions for Staking Modules

Currently, Lido uses a single NodeOperatorsRegistry contract, which is a curated registry of selected node operators controlled by a DAO.

The Staking Router proposal will allow for the introduction of additional modules that support a more diverse operator base by leveraging mechanisms such as DVT, bonding, and reputation scoring to enable permissionless entry into the node operator set.

Community Module: Bonded permissionless node operators have optional mechanisms to effectively reduce collateral requirements based on reputation (e.g., based on successful performance).

Looking ahead, some of these modules may include:

• DVT Module: Validators supporting DVT (with optional bonding), such as Obol's distributed validator set or SSV nodes.

• Off-chain or L2 Module: Reducing gas costs by pushing the storage of validator keys off-chain or to L2 solutions.

To expand on this, there can be many modules of the same type (or with overlapping types, such as DVT + Community) operating within the same staking pool. Each module will be able to express a specific purpose or theme through the types of operators they use to generate validators to add to the pool.

Finally, the Staking Router coordinates deposits and withdrawals to meet the equity distribution required by the DAO and allows the treasury staking rewards and equity distribution algorithms set by the DAO to control validator allocation.

Withdrawals

Withdrawals will enable users to unstake their stETH to receive staked ETH at a 1:1 ratio.

As withdrawals are a fundamental feature of liquid staking, we strive to make the best design that balances user experience and operational speed with the security of the protocol.

Due to the inherent complexity of Ethereum's network design, where the functions of the consensus layer and execution layer are somewhat separated, the proposed withdrawal mechanism added to the Lido protocol design will have two modes: Turbo mode and Bunker mode.

For a more detailed explanation of Lido withdrawals, including an in-depth look at Turbo and Bunker modes, please refer to the technical analysis prepared by Lido protocol engineering contributors here.

Turbo Mode

This is the default mode used unless a catastrophic event or unforeseen circumstances affect the Ethereum network. In Turbo mode, all available ETH from user deposits and rewards can quickly meet withdrawal requests. The duration of exiting the network is uncertain; however, in the best-case scenario, withdrawal requests can be processed within hours without validators exiting.

To make the process as smooth as possible, contributors have proposed automation tools for the protocol and node operators. These tools will be used to help automate the process around validator exits, thereby minimizing potential delays.

Bunker Mode

To orderly handle withdrawals in catastrophic scenarios, the Bunker mode has been proposed. Its purpose is to prevent seasoned participants from gaining an unfair advantage over other stakers by delaying withdrawals and socializing negative impacts across the entire protocol.

Claimant Overview

Due to the asynchronous nature of Ethereum withdrawals, withdrawal requests will be processed through a Request/Claim process.

Request: Users lock stETH as a withdrawal request. Execution: The protocol acquires ETH to fulfill the withdrawal request, locks these ETH, destroys the locked stETH, and marks the withdrawal request as claimable. Claim: Users can claim their ETH at any time.

The execution time is also uncertain. In the best-case scenario, it is expected to take a few hours, and in most cases, most requests should be completed within a week. However, in the worst-case scenario, it may take much longer.

It should also be noted that while users are queued for withdrawals (and exiting the staking network), they will not earn staking rewards.

Protocol Upgrade Security Approach

The code for this upgrade to the Lido V2 proposal has undergone the most rigorous scrutiny to date, with seven different independent audits conducted.

Security is paramount, and countless hours have been spent on internal and external testing.

According to the recently introduced audit policy, we have collaborated with multiple audit service providers to conduct diverse and thorough security assessments of all codebases related to the upgrade. Some of them are long-term partners, while others will contribute to Lido's security for the first time.

Below is the complete list of confirmed audit service providers:

Sigma Prime will audit the updated dc4bc version designed for the 0x00->0x01 withdrawal credential rotation ceremony.

ChainSecurity will be the first audit party to carefully examine the Staking Router code in January. ChainSecurity's work will be used to identify potential weaknesses before merging new key protocol components into the final protocol upgrade code.

Oxorio will audit the protocol enabling Ethereum withdrawals codebase from February to March.

Statemind will audit the protocol enabling Ethereum withdrawals codebase from February to March.

HEXENS will audit the protocol enabling Ethereum withdrawals codebase from February to March.

The MixBytes () Camp security audit competition for the protocol's smart contracts is scheduled for February to March.

Certora will be the final contributor to the protocol upgrade security, providing a complete protocol audit and formal verification in February to March.

A complete list of audits performed on the Lido codebase and detailed reports can be found in a dedicated public GitHub repository.

Release Details

Below is a rough timeline, not final, and subject to change.

Early February:

Code freeze and security audits begin.

End of February:

Signal snapshot vote for the upgrade to pre-commit "upgrade parameters" and overall design support from the DAO.

Early March:

Launch on the Goerli testnet. Complete testing of all code (on-chain and off-chain), Oracle & NO automation.

March/April:

Withdrawal credential rotation ceremony (0x00 -> 0x01). Protocol upgrade before the hard fork. Mainnet contract deployment. Aragon on the protocol upgrade. Planned Shanghai/Capella hard fork.

Lido V2 opens the development ecosystem to external contributors from all corners of the Ethereum ecosystem.

The rollout of the modular capabilities of the Staking Router will come over time, initially prioritizing community and DVT-based modules.

Soon, community developers, project teams, and researchers will be able to contribute directly to Lido by proposing Staking Router modules that will be reviewed by the DAO.

After the upgrade, the Lido DAO invites you to join our research forum, which will publish further updates for collaborative proposals. The Lido protocol aims to foster and support external contributors as much as possible.

Conclusion

As stated here, the mission of the Lido protocol is to make staking simple and secure while maintaining Ethereum's decentralization and censorship resistance.

In this context, the Staking Router is a key milestone in achieving the goal of cultivating the best validator set for Ethereum—it will not compromise on quality, security, or decentralization.

Over the past two years, the position of the Lido protocol has steadily risen, becoming an indispensable part of the Ethereum ecosystem and the broader DeFi space. To date, over 100,000 unique staker addresses have deposited more than 4,815,040 ETH into the Lido protocol, highlighting the tremendous success in achieving the goal of democratizing access to staking.

The Lido protocol's commitment to trustless staking, network democratization, and enhancing the resilience of the Ethereum protocol remains steadfast. With the launch of Lido V2, the Lido protocol looks forward to sharing more information with our ever-growing community of users, node operators, and LDO holders.