PEAK LIDO? As Ethereum transitioned over the past year to a fully functional proof-of-stake blockchain, market observers chronicled the staggering rise of Lido Finance, which effectively allows investors to stake their ether (ETH) – and thus earn rewards, yield – while also getting a token, stETH, that they can trade in the meantime. For many, that combination proved more attractive than the technically cumbersome job of setting up a validator and locking up ETH into the main blockchain. The problem now is that Lido has become too popular – bumping up against the 33% threshold of total ETH staked where the project could theoretically threaten the 67% supermajority needed to finalize transactions. Now, there are signs of pushback from the crypto community – as well as growing pains for Lido in managing such a sprawling operation. Late last week, voting closed among members of the Arbitrum network community on how to allocate an incentive program of 50 million ARB tokens (worth about $40 million), and Lido was denied in its application for 4 million ARB – seen as an expression of protest. “The Ethereum immune system is waking up,” Evan Van Ness, publisher of Week in Ethereum News, posted on X. Defenders of Lido are quick to point out that the protocol has merely made the most of blockchain incentives and innovation, and that the real threat still comes from more centralized players, such as big crypto exchanges. “The fact of the matter is Lido has, and is heavily incentivized (as revealed in their growth) to act responsibly, and its presence elevates Ethereum decentralization, not contaminates,” according to a Messari report. But there are also operational issues. Lido had to explain in a post-mortem analysis last week why 20 of its Ethereum validators recently got “slashed,” or penalized: “The root cause of the slashing boiled down to executing non-optimal fallback procedures during datacenter connectivity issues.” Got that? There was also the news that Lido has decided to sunset a separate staking service on the Solana blockchain; it was just too costly, with a $700,000 investment over the 2022-2023 budget and only $220,000 of revenue. “It was deemed a necessity for the success of the broader Lido protocol ecosystem,” the project’s developers wrote in a post. Resorting to the tourniquet might be a rare sign of weakness from the single most successful project in all of DeFi.
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