Dialogue with Lido strategic advisor Hasu: Will Lido pose a threat to Ethereum?

Original Title: Hasu Explains: Is Lido a Threat to Ethereum?

Compiled by: Deep Tide TechFlow

Does Lido holding over 30% of ETH warrant our concern?

In this interview, Lido's strategic advisor Hasu discusses the current state of staking, Lido's ongoing developments, and raises a question—has Lido been unfairly or inaccurately evaluated?

As the LSD track heats up, paying attention to the development of leading projects and the opinions of industry insiders helps us better seize opportunities.

5-minute reading podcast notes save you 80 minutes.

Here are the main points from the conversation, transcribed and organized by Deep Tide:

Host: David, Bankless

Speaker: Hasu, Lido Strategic Advisor

Video Attribution: Bankless Podcast

Program: Link

Release Date: August 7

Current Controversies Surrounding Lido

• David mentioned that the controversy surrounding Lido is increasing, with conflicts arising between it and other staking service organizations. Some criticisms may stem from genuine concerns, while others may be based on narratives or opportunism from other staking service organizations.

• Hasu stated that the controversy surrounding Lido mainly focuses on its scale. Due to its size, Lido may have a certain influence over Ethereum validators.

• Another point of contention is the stETH asset issued by Lido, which offers users additional yield compared to ETH, as it represents the staking of validators on the Beacon chain. This makes stETH more attractive than ETH but also introduces systemic risks.

• Hasu mentioned that if issues arise with stETH (Lido's token), deciding how to address these issues would be a complex decision that could lead to a split within the Ethereum community.

• The host noted that the market's demand for staked ETH is inevitable, as it is a derivative version of ETH that can provide users with more yield. Therefore, the core of this discussion is which free market service provider will offer this staked ETH to the Ethereum economy.

• Hasu agreed with David's point and mentioned that this is an inherent issue that any chain using a proof-of-stake mechanism will face.

• The host pointed out that this issue is similar to early problems with Ethereum when a large amount of ETH was concentrated in one place, such as centralized exchanges or MakerDAO, which could lead to systemic risks.

• Hasu recalled that Vitalik Buterin once suggested limiting the funding scale of DAOs or ICOs to reduce systemic risks, but the market always finds ways to circumvent these restrictions.

Potential Risks and Consequences of Lido Holding Large Amounts of ETH

• The host further explored the potential risks of Lido holding large amounts of ETH. He mentioned that if Lido's smart contracts were hacked, the hacker could control a significant amount of ETH. Hasu responded that since ETH has already been staked on the Beacon chain, it cannot be immediately withdrawn from Lido, providing the community time to decide how to respond.

• The host noted that when a staking organization holds a large amount of ETH, it could influence the protocol. He asked Hasu what could happen if an entity controlled 33% or 66% of all staked ETH.

• Hasu emphasized that to ensure the security and proper functioning of a distributed network, there must be enough participants honestly following the consensus protocol's rules, incentivized to encourage such behavior. Under Ethereum's consensus mechanism, holders are required to stake their ETH as collateral to gain voting rights or stakes in the network.

• Hasu mentioned that Lido's risks mainly revolve around external attackers potentially entering governance, such as purchasing large amounts of Lido or introducing proposals through other means, thereby attacking the smart contracts of staked ETH.

Node Operators, Governance, and Weight

• Lido is essentially a decentralized protocol from holders to node operators, currently with 29 different node operators, a number that is still increasing. These node operators are not the same party and do not always follow Lido's protocol directives.

• Host David discussed the thresholds in proof-of-stake. If a staking entity exceeds certain thresholds controlled by the protocol, that entity's governance becomes very important. For example, if an entity controls 33% of all staked ETH, they can influence and control finality. If they control 66%, they essentially control Ethereum and can choose the outcome of the protocol.

• David pointed out that Ethereum's governance philosophy is not to govern on-chain. However, if a service entity like Lido holds over 33% of ETH, it may bypass Ethereum's off-chain governance philosophy.

• Hasu responded that even if Lido's governance decides to take some action against Ethereum, it would still require the coordination of the majority of the 29 node operators to execute that decision. Since these node operators run their own local infrastructure, they decide how to build blocks, how to validate, etc. Hasu explained that while Lido can suggest how node operators should act, they are not bound to follow Lido's recommendations and currently have no strong means to punish those who do not comply.

• In the months leading up to Ethereum's merge, Lido began considering how to handle MEV. They needed to decide whether to extract MEV and how to do so. Lido's policy aims to ensure that node operators cannot conceal MEV, preventing them from stealing funds from users without informing or sharing the profits, thereby ensuring the safety of users' funds.

• Hasu emphasized how Lido makes decisions. Lido does not make impromptu decisions but tries to formulate well-thought-out policies that may be reviewed and revised annually.

• Host David mentioned that Lido holding 31% of the stake is not ideal. Ideally, all ETH should be staked by individual holders. However, in reality, he prefers Lido holding 31% of the stake rather than a centralized exchange like Binance holding the same stake.

Relationship Between Node Operators and Lido DAO

• David further explored the relationship between Lido node operators and Lido DAO. He asked whether node operators could act independently of a decision made by the DAO that could be harmful to Ethereum.

• Hasu explained Lido's new concept—Dual Governance. This means governance responsibilities will be distributed between Lido token holders and stakers. This dual governance system is similar to a bicameral governance system, such as Optimism's bicameral system, which includes token holders and nominated community participants. (Deep Tide Note: A bicameral governance system means there are two different governing bodies or groups, each with its own rights and responsibilities, participating in the decision-making process together.)

• Lido's dual governance system allows stakers to veto proposals and penalize those who propose and vote, creating significant barriers to malicious proposals.

• Host David mentioned that Lido's dual governance system is designed to ensure that Lido's governance does not contradict Ethereum's off-chain governance philosophy. Hasu explained that stakers can veto Lido's proposals but cannot change the protocol.

• David compared the operation of crypto organizations to traditional companies, pointing out that crypto economic protocols can design such governance systems, while traditional companies cannot. Hasu mentioned that the dual governance system is still under research and may be launched before the end of this year.

• The host asked how node operators would react if Lido DAO passed a proposal that a node operator disagreed with. Hasu responded that in the future, if node operators want to leave, Lido DAO can programmatically exit these validators.

Dual Governance, V2 Version, and Modularity

• David asked whether Lido could be forked and whether, in some cases, a "Lido Classic" version could be created. Hasu explained that Lido's code can be forked, but since ETH has already been staked on the Beacon chain, it cannot be immediately withdrawn from Lido. (Forking: copying or modifying Lido's code)

• Hasu mentioned Lido's new version—Lido V2. This version introduces two main features: 1) it allows withdrawals from the Beacon chain, and 2) it introduces a staking router that can represent different staking strategies or node operators. Hasu predicts that in the next three to four years, Lido may have over 5,000 node operators.

• David further explored Lido's modular design, noting that this design pattern is becoming increasingly common in the crypto space. He mentioned Ethereum's roll-up centralization roadmap and how to compare the design patterns of other layers with Lido V2. Hasu explained that Lido is working to push complexity to the edges, making the core protocol simple, easy to understand, and auditable.

• Hasu emphasized the importance of network effects, noting that in industries with network effects, there is usually one or a few dominant players. He mentioned other projects that dominate on Ethereum, such as Uniswap and Metamask, which leverage network effects by providing unique features and excellent user experiences, thereby attracting a large number of users and dominating their respective fields.

About the Ethereum Community

• Hasu discussed the characteristics of the Ethereum community, particularly how it differs from the Bitcoin community. He noted that while the Bitcoin community is very radical, they cannot prevent 80% of blocks from being generated in China or 50% of blocks from being updated by American public companies.

• Hasu discussed the core values of the Ethereum community, such as optimism, science, creativity, and community. He believes that the Ethereum community should strive to solve problems while remaining loyal to these core values.

• Host David mentioned certain struggles within the Ethereum community, particularly the struggle between centralization and decentralization. He believes that to maintain decentralization, the community needs to uphold a steadfast core willing to sacrifice some interests to do the right thing.

• Hasu mentioned certain characteristics of Ethereum, such as how it maximizes MEV extraction while simultaneously democratizing it. He also referenced Vitalik's "finality" post, where Vitalik discussed how to ensure block validation remains decentralized while providing users with a censorship-resistant mechanism.

• David asked Hasu whether he believes Lido has faced unfair criticism or attacks within the community. This could imply that Lido may have been questioned or misunderstood in certain aspects.

• Hasu first clarified that he does not believe the main leaders or influencers of Ethereum view Lido as inconsistent with Ethereum's goals and values. This means that while there may be some controversy or differing opinions, the mainstream Ethereum community does not see Lido as opposing or contradicting Ethereum.

• Hasu also pointed out that while Ethereum's leaders may not oppose Lido, they may believe that Lido has some differing views or strategies from theirs. This means that although both Lido and Ethereum's main leaders support Ethereum's long-term goals, there may be differences in the specific methods or strategies for achieving those goals.