Bankless: SEC Lawsuit Raises Alarm on Lido Staking Centralization

Author: Bankless; Compiler: BitpushNews Mary Liu

It’s not easy to ponder whether cryptocurrencies face an existential threat after last week’s regulatory onslaught, but in this article we’ll discuss Lido’s centralization issues — an issue that may only be exacerbated by last week’s CEX lawsuit.

For months, staunch ethereum decentralization proponents and LSD holders have been patiently waiting for what crypto analysts deemed inevitable: the exodus of Lido staking.

Many people (including some of us at Bankless) naively concluded that enabling withdrawals during the Shapella upgrade would help decentralize Ethereum staking. Unfortunately, reality doesn't match that narrative, and now, with the more established Lido approaching control of 1/3 of all staked ETH, the Ethereum community is seriously starting to sound the alarm.

We'll explore why the SEC's attack on exchange staking will only further benefit Lido, show why Lido's success story is self-perpetuating, and explain why breaking Lido's staking centralization is imperative.

SEC's "Boost"

Just last week, the SEC went after Binance and Coinbase. The scope of the charges against the two exchanges varies, but both complaints share a common theme: The SEC is going after the two CEXs for staking services to their U.S. users.

Binance and Coinbase control 15.3% of all ETH on the Beacon Chain with offerings that are very competitive with what Lido offers.

**While the SEC complaint does not target Ethereum staking solutions, the agency has signaled their willingness to go after Ethereum staking. **

Back in February, Kraken was forced to terminate its Ethereum staking service for US users as part of a settlement with the SEC, something Gensler Chairman claimed “should be brought to the attention of everyone in this market.”

**The deposit pattern caused by the SEC's continuous crackdown will become more centralized, and Lido may occupy a larger ETH mortgage market share. **

Self-perpetuating prophecy

Despite enabling withdrawals, Lido maintained its dominance over Ethereum staking, with deposits increasing by nearly 900,000 ETH (14.3%) this month. Since Shapella, Lido's market share has increased from 31.4% to 31.6% - evidence that the agreement has turned past success into a self-perpetuating future dominance.

Lido derives these ongoing advantages from the natural advantages of its ETH staking derivatives and ability to undercut competitors' fee structures.

Token Advantage

Holders of stETH benefit from the token’s deep liquidity — making it one of the only viable liquid collateral options for whales — and extensive collateral integration in DeFi increases the token’s use cases.

Since stETH has certain characteristics that make it more attractive than regular LSD, capital—especially mature capital looking for the best combination of investment attributes—will continue to flow into the token, which further makes Lido’s staking derivatives more attractive than other Competitors have an advantage.

Fee Structure

**Currently, Lido offers the lowest fees of any blue-chip staking provider, which means financial incentives are actively driving stakers to Lido. **

The gap between Lido and its closest competitors will only widen over time, while squeezing profits, which squeezes the market space for other competitors as more and more stakers flock to Lido , to take advantage of what they see as an increasingly lucrative staking opportunity.

There are clear parallels to Lido's in the traditional financial world.

Vanguard revolutionized the investing world in the 1980s with low-cost passive index giants, consistently lowering competitors' fees in a race to the bottom, and was able to maintain an advantage for nearly half a century. Lido borrowed directly from the playbook!

Breaking Lido's centralized position

The Lido governance group shrugged off the existential threat posed by its rising stake ratio and voted overwhelmingly against self-limiting deposits in June 2022.

At first glance, it might seem that doing so is against the best interests of LDO token holders and hurts Lido's profitability, however, it is clear that the consequences of failing to limit themselves are very real.

There is growing support for Ethereum holders against Lido, with some arguing that if they refuse to self-limit, the community should forcibly correct their behavior. While worrisome, it's unlikely we'll see such controls enforced at the base layer, as that would require a hard fork, which would potentially disrupt ethereum's fragile social consensus layer and potentially lead to the much-maligned chain fork.

**The Lido community should worry about the prospect of its staking centralization translating into suppressing future demand for Ethereum block space. **

The protocol approaches the first of three critical thresholds at which core properties of Ethereum’s value proposition are downgraded, giving would-be attackers greater power over the chain. If Lido continues to grow at an uncontrolled rate, it will inevitably exceed these thresholds and pose a systemic risk to the ecosystem.

In the bull markets of past cycles, the narrative of decentralization and censorship resistance has always been overlooked by the hottest trends of the moment.

**There is no better time to protect the fundamental properties of the Ethereum network than a bear market. ** Without aggressive activity to disrupt Lido's dominance, staking providers will likely continue to expand their market share.

So how do you get involved?

Thankfully, the battle for crypto disruption always comes from small forces, and you don’t need to be a whale to participate in the decentralization of staked ETH.

First of all, don't mortgage on Lido.

You can consider staking on Swell and strive to qualify for the SWELL airdrop later this year, start your own Rocket Pool mini-mine pool with as little as 8 ETH, and earn higher returns by charging commissions for Ethereum mortgaged to personal nodes , or deposit Ethereum LSD into unshETH to increase rewards through token incentives. For more technically savvy users, we might recommend running your own validator.

Regardless, moving staking off Lido will help this fight against centralization, but wallet power alone won't stop Lido from continuing to dominate, now is the time to follow the lead of the activists and keep speaking out!