Lido Overview & Alternatives
The original article — “Is Lido good for Ethereum?” doesn’t really come to a conclusion on whether Lido is good or not but provides a great overview of what Lido is and what the alternatives are (for ETH staking)
The premise of this article is based on the FUD about Lido. The FUD is based on the fact that they have a significant control on ETH’s consensus layer
What is Lido?
Lido is a smart contract that facilitates folks to stake that 1) don’t have 32 ETH and/or 2) don’t want to run their own validator
So who actually “stakes”? Node operators (NOs). NOs have to setup the hardware + infrastructure to run a validator. Lido decides who can be a validator via an initial governance vote
Initially, NOs are granted a small # of keys (keys to sign / stake on behalf of the deposited ETH)
Over time, as these NOs do a good job, Lido’s smart contract will distribute more deposited ETH – there is logic to make sure that no one NO gets too big of a concentration, etc
So what if these NOs rug? There are a couple safety measures in place
The Lido smart contract sets a static (immutable) withdrawal address for each key
The incentives are aligned – it doesn’t make sense for a known operator to behave poorly. They lose future fee income, and have reputational risk (operators are doxxed)
But keep in mind, Lido can’t actually force these operators to do anything
With distributed validator technology (DVT), permissionless operators the risk does increase
Isn’t Lido centralized?
Currently Lido consists of 31 individual permissioned operators
They each run different hardware, different clients and can choose which MEV relays they use. They are located in diverse geographic locations and legal jurisdictions to provide high resilience and redundancy.
Is Lido centralized because it only has 31 operators? What if it had 5,000+ operators and allowed for permissionless entry?
More distinct operators isn’t a cure-all either since you can have large operators with 98% stake and 4000 permissionless operators with 2%
Alternatives
Staking on CEX - issue is “not your keys, not your coins”. The centralization issue is still present
Permissionless protocols - these are protocols that already allow you to join as an operator, permissionlessly, with no questions asked. Lido moving towards this with the V2 staking router and permissionless modules but not quite there yet
How to incentivize good behavior? Make stakers put up a deposit – and have consequences if they are malicious
This presents the issue of capital efficiency (e.g imagine a protocol that asks you for 1 ETH for every 10 ETH that is staked)
The exhaustive list on how you would stake is:
Solo stake - requires 32 ETH
Buy LST (stETH, rETH, cbETH)
Stake with a pool (Stakefish, p2p)
Operate a node with a pool (Rocketpool, StakeWise V3)
Over time, there will be more ways to stake, with more optionality to whatever fits you
Here’s my Twitter — feel free to reach out if you have any questions, want to discuss the article or just chat!