Last week, Lido put forward a governance proposal to limit the amount of Ethereum that users can stake after facing criticism from the crypto community.
"Who will be the first staking provider to publicly commit to limiting themselves to not operating more than 22% of validators on the chain?" tweeted Ethereum's Beacon Chain community manager Superphiz. "Who do you want to see step up to the plate and prioritize beacon chain health above profits?"
Lido is a liquid staking service, that lets users deposit assets like Ethereum, Solana, Polygon, and others to earn a yield. Whenever users stake these assets, they receive another staked version of the same token, which can be used elsewhere in the market.
Lido's staking service has become extremely popular of late, raising concerns about a large amount of Ethereum currently concentrated in one staking pool.
Despite centralization worries, voting for this latest proposal has thus far been extremely one-sided, with nearly 99.8% of the Lido community voting against limiting how much Ethereum Lido can service. Less than 0.2% of holders have voted in favor of the proposal.
The vote is scheduled to end by July 1, 2022.
Lido and Ethereum upgrade
It should also be said that these concerns are coming just two months before Ethereum's Merge event. The ETH staked on Lido is added to the Ethereum Beacon Chain, a proof-of-stake (PoS) version of the original blockchain.
Following the Merge event slated for this August, all of Ethereum will move to the Beacon Chain, launching the long-awaited Ethereum 2.0 upgrade.
Various validators currently stake approximately 12.9 million Ethereum on the Ethereum Beacon Chain.
Lido accounts for a whopping 31.80% of this total, or approximately 4.126 million ETH, suggests data from Dune Analytics.
After Lido, other large depositors include Kraken (8.53%), Binance (6.77%), Staked.us (3.02%) and Stakefish (2.14%).
For decentralization maximalists, Lido's dominance is a serious concern.
"Speculative controversial take: we should legitimize price gouging by top stake pool providers," tweeted Ethereum's co-creator Vitalik Buterin. "Like, if a stake pool controls [more than] 15%, it should be accepted and even expected for the pool to keep increasing its fee rate until it goes back below 15%."
Unpacking Lido's centralization concerns
Lido's dominant staking position could pose risks to the decentralized model of the network and lead to attacks, according to Danny Ryan, a researcher at Ethereum Foundation.
"Lido passing 1/3 is a centralization attack on PoS," he tweeted. "We're bad at assessing tail risk, but staking in Lido at these thresholds has a lot of it."
Lido passing 1/3 is a centralization attack on PoS.
We're bad at assessing tail risk, but staking in Lido at these thresholds has a lot of it.
In blockchain systems, tail risk isn't even necessarily so far fetch. Systems tend to hit edge cases, systems tend to get exploited 1/2
— dannyryan 🧱🔥 (@dannyryan) May 10, 2022
"Lido was started with two simple aims: to democratize access to staking, and to prevent centralized exchanges from gaining the lion's share of staked Ethereum," tweeted Lido in response to centralized attack possibility claims. "In short, to keep Ethereum decentralized."
The current proof-of-work (PoW) consensus model also has these threats. But the need for high computational resources safeguards the network.