Lido's Impact on Ethereum Decentralization and Its Solutions

After Ethereum transitioned from POW to POS, Lido, as one of the biggest beneficiaries, saw its market share rapidly increase, raising community concerns about the decentralization of Ethereum. Some believe that Lido's rise could undermine Ethereum's decentralization characteristics, threatening the network's security and stability. Others argue that these concerns are more of a marketing tactic aimed at slowing down Lido's growth. This article will delve into an analysis of Lido's market share and centralization risks, objectively assessing its impact on Ethereum.

Lido's Market Dominance

Lido is a project that addresses the liquidity shortage of staking tokens in PoS blockchains. It allows users to participate in staking with any amount through liquid staking, significantly lowering the threshold. Currently, Lido has staked 8,813,670 Ether, occupying 31.8% of the Ethereum staking market. This high proportion has attracted attention from various parties, including Ethereum founder Vitalik.

Researchers have pointed out that Lido operates over 38% of validators, far exceeding the control range of any single entity. A researcher emphasized that Lido controls a large amount of staked Ether and occupies over 90% of the liquid staking market share, which may face risks such as validator reductions, governance attacks, and smart contract vulnerabilities.

The Actual Impact of Lido's Centralization Risk

Although Lido's market share is close to the 33% security line, its centralization risk may be overstated. First, Lido allocates funds to 29 operators to execute staking, providing a higher degree of risk diversification. Second, node operators lack the motivation to act maliciously, as this could lead to them being "slashed" and losing their source of income.

The biggest potential risk is that the node operators designated by Lido may form interest alliances. However, Lido has strict standards when selecting operators to ensure server diversity, geographical distribution, and client diversity, thereby reducing the risk of centralization. Even if issues arise, the social layer can intervene to eliminate malicious nodes.

The Broader Issues Reflected by Lido

The situation with Lido reflects the broader trend of centralization faced by Ethereum after its transition to POS. Large stakeholders may dominate transaction validation, leading to a consolidation of power. In contrast, centralized exchanges like Coinbase and Binance may pose a greater threat, as they could be influenced by government pressure on the Ethereum staking market as a single entity.

Lido, as a decentralized "alliance", is composed of multiple node operators, which alleviates this risk to some extent. However, its high market share still raises concerns about systemic risk.

Solutions to the Lido Issues

To mitigate the risks brought by Lido, the Ethereum ecosystem can take the following measures:

1. Support non-mainstream liquid staking tokens to diversify market demand.
2. Lido may consider self-limiting its market share to promote healthy market development.
3. Improve the level of internal Decentralization and strengthen fault safety measures.
4. Establish a fair anti-fraud mechanism to maintain market integrity.
5. Increase the number of node operators to enhance the diversity of staking capabilities.
6. Build appropriate system safeguards to fulfill the responsibilities of a market leader.
7. Implement an automatic fee adjustment mechanism to increase user costs when market share exceeds the limit.

Conclusion

The controversy sparked by Lido reminds us of the need to balance multiple aspects of the market. Although Lido's high market share raises concerns, it also somewhat prevents centralized exchanges from monopolizing the staking market. In the future, the Ethereum ecosystem needs to find a balance between maintaining decentralization and ensuring fair competition in the market to ensure long-term healthy development.