Response to The Risks of LSDs
Original tweet (posted on Sep 3, 2023)
Sachayve put together a response to The Risks of LSDs (my summary).
The quality of thinking inspires confidence in the Lido team I'm glad they are the ones working on a protocol so core to ETH.
Here are my takeaways (p.s. you should read through the original article or the summary first if you are unfamiliar with Lido, its role within the ETH network and the arguments against it).
What is dual governance?
Dual gov allows stETH holders and LDO holders to both have a say – to percent LDO holders to make changes without stETH holders consent
stETH holders have the power to veto any governance vote
How does this mitigate mentioned risks?
Governance token approach
Dual gov should mitigate this issue – if stETH holders can ultimately veto proposals, it becomes much less feasible for the “cartel” to acquire all the LDO + stETH req for these shenanigans
Economic selection approach
A simple, automated approach is way too simple currently, there needs are many important factors that aren’t necessarily onchain (geography, jurisdiction)
Because of this, humans will probably need to continue being in the loop
LSD holders governance approach
The combination of LDO + stETH holders is larger and more representative of the ETH eco
Proof of Stake itself allows for this combination to pick in a way that prioritizes what is best for the ETH protocol. Why? If ETH protocol degrades over time, the “stake” loses economic value
Protocol slowly changing over time
The alternative to this isn’t that the protocol doesn’t change. It is that the protocol changes based off decisions of a small set of individuals – having a governance structure is much preferred here
User Representation
“99.9% of users probably don’t care much about forms of time-sensitive censorship which do not directly concern them, whereas most contributors to an ethereum-aligned liquid staking protocol probably do”
Self-limiting (Lido imposing its own limits)
While it sounds good in theory, it won't work in practice. “The endgame here is likely a win for parties that the community can’t exert influence over: liquid staking on exchanges, institutional (and permissioned) staking products, or more immutable (and less resilient) protocols”