Could Lido Finance’s popularity put a damper on Ethereum’s decentralisation?

  • The high incentivisation of Lido Finance staking pools could centralise ETH supply control to the protocol.
  • Ethereum will gain sufficient decentralisation to offset a potentially dominant Lido with the increasing adoption of competing liquid staking solutions.

Lido Finance is Ethereum’s premier liquid staking protocol and has in recent months seen parabolic growth in the volume of staking deposits it receives. 

The spark behind the surge was the launch of the Beacon Chain, Ethereum’s PoS blockchain, to which users can’t withdraw their staked assets until launch. A leader in liquid staking, Lido Finance allows users, especially those who cannot manage their validator nodes, to put their ETH into staking pools at a 4% APR yield.

Amongst other advantages, users who stake in Lido’s pools get shielding from the risk of slashing, but for this, the protocol pockets 10% of the staking rewards.

High incentivisation to stake with Lido

Now concerns are rising that soon Lido Finance could have control over a substantial amount of Ether. Lido Finance gives stETH, an auto compounding token, to users who stake with it. Stakers can then use the stETH to provide liquidity on AMMs, & DeFi protocols and can also use the asset to net swap fees – all beyond the 4% yield. Also, stETH can be collateralised for lending and borrowing.

The consistent financial incentives that come with the Lido Finance staking product means its trajectory of staking pool dominance in the amount of ETH controlled could only head upwards – it’s probable Lido could attempt shaping a monopoly. 

“The more liquid stETH is on these platforms, the lower the opportunity cost of staking, which leads to more ETH being staked with Lido, which then increases the stETH liquidity. This deep liquidity in stETH incentivises the user to stake with the market leader,” an extract from Sure Sats reads.

With the Merge coming, Lido’s spending power enables it to extract the most maximum extractable value (MEV), and the platform says it will effectively double its APR in staking rewards thereafter. All in all, it’s expected that as more investors take up ETH, diversification should come, demeaning the amounts staked with Lido. 

However, even with that, Lido’s influence won’t just fade away as the protocol offers more capital efficient options than competitors with more ‘convenient’ platforms such as Kraken exchange. Currently, Lido Finance controls 30.02% of the supply locked on the Beacon Chain deposit contract – 3,607,136 ETH. The second-largest depositor, Kraken, controls nearly four times less the staked ETH – 8.58%.

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