Lead Ethereum developer, Danny Ryan stated that Liquid staking derivatives (LSD), comparable to Lido and related protocols, can pose vital dangers to the Ethereum protocol and pooled capital once they exceed important consensus thresholds.
He highlights the hazards of cartelization and emphasizes the necessity for self-limitation to keep away from centralization and protocol dangers that would probably hurt the product. In accordance with him, acknowledging and addressing these inherent dangers is essential to keep up the soundness and integrity of the Ethereum ecosystem.
Repost — LSDs above important consensus thresholds pose dangers to the Ethereum protocol
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— dannyryan (@dannyryan) May 31, 2023
Ryan stated that it’s essential to acknowledge the dangers posed by LSD protocols to each the Ethereum protocol and the capital allotted to them. Cartelization, abusive MEV extraction, and censorship threaten the soundness and safety of the Ethereum community. Whereas customers and builders can reply to those threats, pooling capital right into a cartelization-prone stratum places each the Ethereum protocol and the pooled capital in danger.
He wrote, “ETH holders, in the long term, are only a subset of customers, so staked ETH holders are even a subset from there. Within the excessive of all ETH changing into staked ETH below one LSD, governance vote weights or aborts by staked ETH don’t shield the Ethereum platform for customers.”
To mitigate these dangers, he recommends that LSD protocols, together with Lido, impose self-limitations and that capital allocators chorus from allocating greater than 25% of complete staked Ether to LSD protocols.
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He added that one other threat of governance deciding node operators is regulatory censorship and management. If pooled stake below a single LSD protocol exceeds 50%, the pooled staked capital positive factors the power to censor blocks, and even worse, at 2/3 majority, they will finalize such blocks. Which means regulatory entities can request censorship from the governance token holders, who then change into a particular goal for regulation.