Lido Finance Decentralizes ETH Staking with Community Module

• Lido Finance launches a community staking module, allowing permissionless entry for node operators, boosting network decentralization.
• Lido’s DAO vote received strong support, marking a significant shift towards increased validator diversity on Ethereum’s mainnet.
• The new staking module aims to address regulatory concerns around stETH, emphasizing community-driven, decentralized participation.

Laura Shin reported that Lido Finance has taken a significant step towards decentralization with the approval of a community staking module on Ethereum’s mainnet.

This measure allows stakers to join as node operators without prior permission. The change marks a key milestone for Lido as it works to expand beyond its current setup, where less than 40 node operators stake the majority of its ETH. This development comes months after the U.S. SEC raised concerns about the nature of stETH, Lido’s primary product.

Understanding the Community Staking Module

The new community staking module aims to increase decentralization by allowing stakers to join as node operators using an ETH bond. This approach opens the protocol to a wider range of participants, replacing the previous curated system. It also seeks to enhance the diversity of validators within Lido, potentially improving its scalability.

Previously, Lido required new node operators to undergo DAO screening to ensure protocol safety during its initial growth phase. The new module opens participation to a broader community, significantly increasing the number of node operators on the network.

DAO Overwhelmingly Approves the Proposal

The vote showed overwhelming support for the new measure from Lido’s governing body. Of the one billion LDO tokens in circulation, nearly 60 million tokens from 134 different addresses approved the proposal. Only 83.6 votes were against it, indicating broad consensus among Lido stakeholders.

This vote aligns with Lido’s efforts to increase decentralization. In addition to increasing the number of operators, the community module allows permissionless entry, a crucial step for any decentralized protocol. This development is expected to diversify the ETH staked within Lido.

Responding to SEC Scrutiny

The module’s release follows the SEC’s suggestion that stETH might be classified as an unregistered security. The regulator hinted at this stance during its recent charge against Consensys, raising questions about the regulatory status of tokens like stETH.

Lido’s new module could be an effort to address potential compliance issues. By enabling community-driven staking, Lido reinforces its position that stETH, like many tokens, is not a security. This approach aligns with industry-wide arguments that crypto tokens operate without a third party, a key Howey Test condition.

Lido’s Position and Future

Lido remains the largest DeFi protocol by total value locked (TVL), holding $24.7 billion. While the protocol’s reliance on a limited number of node operators has been a concern, the new module addresses this issue. The change aims to enhance network decentralization and security by increasing operator numbers.

Lido will likely continue to focus on boosting community participation and decentralization. This move may strengthen Lido’s reputation as a leader in liquid staking, especially as Ethereum’s staking ecosystem evolves. The introduction of the module could also encourage similar decentralization efforts across other protocols.