The Ethereum ecosystem finds itself in the throes of a controversy surrounding the outsized footprint one of its staking pools, Lido Finance (LDO), has on the overall network.

“Centralization concerns around LSD’s are well-founded” began a tweet by founder of The Daily Gwei and independent Ethereum educator, Anthony Sassano. He added: “If my fellow Ethereans want Lido dominance to go down, then they need to create and promote better liquid staking protocols.”

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The current controversy surrounding the Ethereum ecosystem refers to liquid staking derivatives, or LSDs, particularly with Lido Finance.

Liquid staking refers to depositing Ethereum in a protocol that then pools it with other user deposits  and stakes the ETH on their behalf. In return, users get another token representing their staked position which accumulates its own rewards. In Lido’s case, users receive Staked Ethereum, or stETH.

The threat at hand is the current market dominance of Lido, which currently accounts for 74% of all LSDs according to DeFi Llama. The pool contains more than 7 million ETH, worth approximately $13 billion dollars—and it has grown by 12% over the past thirty days.

“The problem is that centralization is easy”, pseudonymous Ethereum Beacon Chain community manager Superphiz told Decrypt. He added that the current situation with Lido is risky because although [a staking provider] “can not halt the chain or prevent transactions, it is still a critical threat to the social decentralization of the chain.”

Another concern are the aforementioned LSDs, derivatives which are created on top of the staked ETH. Derivatives, in finance, refer to an instrument that derives its value from another asset. They are used to further speculate on any given asset, in this case ETH.

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Ari Paul, founder of BlockTower Capital, said on Twitter the main problem with this degree of centralization is “when Lido faces government action and starts censoring to avoid criminal charges.”

His concerns echo discussion around centralization last year, before the Ethereum merge. At the time, the worry was that centralized entities would block certain transactions, like wallets that had interacted with US-sanctioned Ethereum mixer Tornado Cash.

Paul added that he would be “very impressed” if the Ethereum community can mitigate this centralization.

But there are further concerns, written by none other than the Ethereum Foundation itself. In a blog post, The Risks of LSD, the foundation writes that if LSD exceed consensus thresholds, they could create “block space cartels.” These cartels can achieve outsized profits thanks to their coordinated maximal extractable value (MEV) extraction, block timing manipulation, and censorship.

Put plainly: The bigger any one pooled staking "cartel" becomes, the more rewards it earns, and the greater the incentive for users to pool their funds with that provider.

Unfortunately, not staking through a pool carries huge disincentives, according to Ethereum core developer and co-author of EIP-1559, Eric Conner. "Solo staking experience is a nightmare” he said, adding he doesn’t blame anyone for going straight to LSDs.

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Solo staking can be a daunting task, which is why many use platforms like Lido.

It requires 32 ETH, or approximately $60,500 dollars, plus a fair amount of technical knowledge. Maintaining a validator node requires certain pieces of hardware, an understanding of key management, and mitigating the risks of going offline because downtime could mean paying penalties.

He added that Ethereum needs to fix the UX of solo staking, thanking Dappnode for making it “as easy as 1 click.” The company sells "no technical knowledge required" hardware that people can use to set up Ethereum or Bitcoin nodes at home and maintains free open source software for a more DIY approach.

Conner singled them out as “the only one doing something about it.”

“I want to see action” was Sassano’s ending note on Twitter. He added that “everyone who is building an LSD or part of an LSD community this is a call to action for you - it's time to kick it into high gear and eat Lido's breakfast, lunch, and dinner (and second dinner).”

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