Lido faces the "Dragon Slayer" siege, and the LSD track welcomes a change

Author: Azuma, Odaily Planet Daily

On September 15, 2022, Ethereum completed the transition of its consensus mechanism from PoW to PoS through "The Merge."

Nearly a year later, the total amount of ETH staked across the network has exceeded 26.4 million, with the staking ratio approaching 22%. As a sector with a relatively clear value cycle, the hidden market value behind "staking services" has become increasingly apparent, amounting to hundreds of billions.

After nearly a year of "competition," the staking sector has formed a relatively stable pattern for a long time. Lido has gradually established its leading position in the sector thanks to its liquidity and composability advantages. As of the time of writing, Lido's market share in the staking sector is approximately 32.43%. Over the past year, almost no other staking service provider has been able to catch up.

Odaily Planet Daily Note: The light blue area at the bottom of the chart represents Lido, with the only "entity" close to its market share being all unverified staking groups combined.

However, while Lido's market position is becoming increasingly stable, an unexpected "political" crisis is quietly brewing. The core issue of this crisis focuses on whether Lido's dominant position in the staking market contradicts Ethereum's vision of decentralization, potentially hindering Ethereum's long-term and healthy development.

Within the community, two opposing viewpoints have emerged. Supporters of Lido argue that it is actually a coordination protocol among multiple participants, and considering it a single entity is absurd; however, opponents believe that a staking protocol that is nearly monopolistic will inevitably harm the credibility of the Ethereum network and may even attract heightened regulatory scrutiny towards the entire Ethereum ecosystem.

Recently, with the outbreak of two events, discussions on this issue have intensified.

Event One: Industry Self-Restraint

The first event is somewhat amusing.

Recently, five staking service providers—Rocket Pool, StakeWise, Stader Labs, Diva Stake, and Puffer Finance—jointly signed a proposal initiated by Ethereum core developer Superphiz in May of this year. The content of the commitment is to ensure the decentralization of the Ethereum network by suggesting that all staking service providers adhere to a self-restraint rule—committing not to hold more than 22% of the Ethereum staking market share.

This "joint declaration" is clearly aimed at Lido.

As of the time of writing, the highest market share among the aforementioned five service providers is Rocket Pool, with only 3.1%, while StakeWise ranks second at a mere 0.3%… Clearly, a 22% market share is a figure that these five service providers are unlikely to reach in the long term, so signing the commitment will have no impact on their current operations.

However, for Lido, which already has a market share exceeding 32%, signing this so-called industry self-restraint commitment would mean having to immediately give up 10% of its market share, effectively forcing Lido to relinquish nearly one-third of its accumulated operational and revenue scale.

To give a somewhat inappropriate analogy, it's like the Chinese team forcing Brazil and Argentina to promise not to compete for the World Cup temporarily… From Lido's perspective, it would naturally refuse to sign this so-called joint commitment. In June of this year, the Lido community had already conducted a governance vote on Superphiz's proposal, with a final opposition rate of 99.81%.

Overall, the industry joint commitment initiated by Superphiz and promoted by Rocket Pool and the other four staking service providers will not have a direct impact on Lido, as this commitment does not impose any binding constraints on Lido's self-operation; at most, it serves to "annoy" them.

However, from an indirect impact perspective, this "theatrical performance" is bound to have a negative effect on Lido's reputation. Therefore, if users do not understand the full context of the situation, they may easily come to the conclusion that—facing this commitment cloaked in "political correctness," Lido has taken actions that are completely contrary to the "collective," which seems to imply an evasion of decentralization responsibilities.

Event Two: Upper-Level Consciousness Interference

Compared to the first event, the second event poses a greater danger for Lido.

The ignition point of this event was Ethereum co-founder Vitalik Buterin. In a recent Discord discussion regarding Reflexer Finance (RAI), Vitalik mentioned that RAI could support less popular liquid staking tokens (other LSD tokens besides stETH) as collateral, believing that the rise of RAI could address Lido's current "monopoly" in the staking market.

As a spiritual leader in the Ethereum community, it is not surprising that Vitalik holds such a stance on Lido's "monopoly" issue. From the perspective of the overall stability of the ecosystem, Lido's large market scale also implies significant single-point risks. Therefore, compared to "standing out alone," Vitalik would prefer "many boats competing on the river."

Earlier, Vitalik had also proposed a suggestion similar to Superphiz's, recommending that all staking service providers limit their market scale to below 15%, a figure that is more stringent than Superphiz's proposed 22%.

Considering Vitalik's transcendent status in the Ethereum community, his stance largely represents the upper-level consciousness of the entire Ethereum community. His direct involvement in guiding RAI also clarifies a potential path to influence the supply and demand of underlying LSD tokens through upper-level application design.

Compared to the "empty talk" of self-restraint commitments, this subtle action has a greater potential impact on Lido. Although RAI's supply is still limited at present, if its scale expands in the future, or if more new upper-level applications begin to intentionally avoid stETH under the same banner, Lido's market share will inevitably face a reduction due to the relative decrease in demand.

In response, Lido quickly provided a reply. The content of the Lido DAO governance forum shows that in June of this year, a project called Let's Get HAI (HAI) submitted a funding application in the forum, hoping to obtain a budget to pay for third-party security audits.

HAI is a RAI fork project on Optimism, and its biggest difference from RAI is its intentional support for stETH. Before the escalation of this event, Lido had agreed to provide HAI with a $63,000 grant, but after HAI announced its receiving address, the payment was delayed for half a month. The day after Vitalik's statement, Lido immediately paid HAI the $63,000, which can also be seen as Lido's counteraction to this event.

What Should Lido Do to Escape This Crisis?

Considering Lido's recent movements, one potential direction it may choose is to seek more developmental soil outside of Ethereum.

On September 5, the Lido Solana team published a proposal in the governance forum, requesting $1.5 million in financial support from Lido DAO.

However, I personally do not believe this is a good solution for breaking the deadlock, for two main reasons.

First, in a bear market environment, external ecosystems are unlikely to provide value feedback similar to Ethereum. Previously, Lido had also deployed to Polkadot and Kusama but ultimately chose to shut down due to unsatisfactory operational conditions. The Lido Solana team also mentioned that if they do not receive financial support, they will consider shutting down their services on Solana.

Second, even if Lido finds quality external developmental soil, the Ethereum ecosystem will still be the main battlefield for Lido's operations and revenue in the short term. External expansion cannot effectively resolve internal conflicts; to address the upper-level consciousness pressure and lower-level coalition impacts within the Ethereum ecosystem, Lido still needs to find solutions within the ecosystem.

Staking itself is not a market with very distinct service differentiation. In other words, compared to other similar competitive services, Lido does not possess a particularly advantageous business model, and its yield situation is not superior. The reason it has accumulated over 32% market share is mainly due to the liquidity and composability advantages established by Lido's long-term stable operations.

The overall staking ratio across the Ethereum network is approaching 22%. This pace is not slow, but it also means that there is still 78% of market space available. As the value of the staking service sector itself amplifies, the upper-level application sector (LSDFi) based on various LSD tokens and services is also thriving, and new market competition is unfolding. Whoever can secure more application scenarios in this new competition will welcome greater market demand, thereby consolidating or even expanding their market scale.

For Lido itself, it can draw lessons from MakerDAO's development strategy. Stablecoins are also a market with indistinct service differentiation. To amplify the market demand for DAI, MakerDAO has been increasing DAI's yield while expanding more use cases for DAI through Spark Protocol.

By following this model, Lido can amplify yield opportunities for stETH through financial tools like Curve and can also build its own upper-level application ecosystem through direct and indirect means (such as funding HAI). This may be an effective strategy to withstand internal pressures and impacts within the Ethereum ecosystem.