Lido’s market dominance and Ethereum decentralization after Merge

Lido's market dominance and Ethereum decentralization after Merge

After the third successful testnet merge, September 19 was recently proposed as the tentative target date for the Ethereum Merge. Ethereum is poised to fully transition from proof of work (PoW), the original consensus mechanism used by the Bitcoin network, to proof-of-stake (PoS), more energy-efficient and used by younger networks such as Solana and Cardano.

“A single merger will not solve Ethereum’s scaling issues. This is just the beginning of a roadmap to achieve future scaling,” Jacob Blish, Head of Business Development at Lido, shared with Cointelegraph.

Ether (ETH) on the Beacon Chain, the PoS network that represents Ethereum transactions, is expected to remain locked for at least six months after the Merger is completed. After the Merger, liquid ETH tokens will start to be used to benefit from transaction fees and the desired maximum value, which means that returns will increase.

The Merger has been the subject of much hype. This is the biggest event in cryptocurrency in a long time, Darren Langley, founder of Rocket Pool, told Cointelegraph, adding, “The lockout period is currently testing liquid stack protocols, but this is mainly because due to macroeconomic conditions and the current centralization drama. finance (CeFi). As soon as it consumes that, a liquid stack will explode.”

Currently, ETH staking returns are close to an annual percentage rate (APR) of 4%, with just over 10% of the ETH supply being staked, according to StakingRewards.

Lido liquid stack service

The launch of the Beacon Chain created a need in the ecosystem for a decentralized liquid stack solution that would compete with centralized exchanges (CEX) and could be used in decentralized finance (DeFi) for borrowing, lending and more.

The staking service offered by Lido became popular as the first protocol to implement a liquid stack derivative on Ethereum by coining the stETH token. Contrary to popular belief, ETH is not meant to be stethed. As Blish said:

“The ETH issued by the Lido is guaranteed at 1 for 1 ETH, but the exchange rate is not fixed. It can fluctuate and trade at a premium or discount, as secondary market forces set the price. This does not affect steETH’s basic support.”

Since Lido was the first to launch a liquid stack product, the protocol is allowed to move forward with other DeFi integrations for stETH as well as other multi-chain staking products for Solana, Polygon, Polkadot and Kusama. The team recently announced that stETH will expand to Layer 2 solutions to continue its DeFi integration.

Balances of various staking protocols in May 2022. Source: Twitter

The protocol has drawn liquidity into the Curve pool with incentives in the form of additional Lido Token (LDO) rewards and a referral program to continue its growth strategy and cement itself as a temporary winner in the liquid stack space.

Compared to other protocols across the entire DeFi ecosystem, Lido stands out as the only product that can compete and even surpass its centralized counterparts, such as the Binance token ETH (BETH), in terms of total block value.

Alternatives to Liquid Stacked Derivatives

At first, new products usually dominate the market, but soon competition comes in and new entrants are found with the potential to gain market share. Due to the network effect that the Lido has achieved in a short time it is difficult for its competitors to catch up and grab a significant share of the market.

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There are slight differences in fees, product decentralization, and the features they offer in other liquid stack projects, but the value proposition is the same: it enables users to maximize the effectiveness of their capital and shape their performance and the securing network.

“The Ethereum ecosystem is built on trustless decentralization. Such voting power in the hands of a single organization certainly goes against that ethic,” Jordan Tonani, Head of Institutions at Cooperative Index, told Cointelegraph, adding, “It’s better to have healthy competition between multiple -liquid stock, and soon after the Merger. , will support a new crop of liquid stack protocols to promote decentralization. “

Rocket Pool represents over 1.5% of all Ethereum at stake, with 1,300 individual node operators spread across 84 geographic locations. As such, it could impact Lido’s market leadership and increase its relevance in the liquids stacking space with new scalable solutions.

Stakehound, Stkr, and Stakewise are some of the other projects trying to carve out Lido’s market share, but still lag behind in depth of liquidity and usefulness as collateral in DeFi.

It is worth pointing out that at first glance the permissionless approach of Rocket Pool seems to be more decentralized, unlike the permissioned approach of Lido, which was a compromise to ensure the reliability of node operators in the early stages the protocol. The Lido team is working on a merit-based recruitment system to abandon the current model.

Monopoly or oligopoly, it must be decentralized

Given these data, Lido currently has a monopoly in the admittedly immature market for liquid stacked derivatives.

Lido, as a Decentralized Autonomous Organization (DAO), opened the discussion on its governance forum regarding limiting stETH to a fixed percentage of all ETH involved. Blish explained:

“We are aligned with Ethereum’s decentralized ethos which is at the heart of our business. Protocol management at DAO ensures that Lido will not take any action that may conflict with our community and values.

In addition, a dual-token governance proposal was recently passed, which allows STETH holders to veto governance proposals from LDO token holders that could harm stakeholders on the Ethereum network.

Similar to the liquid staking dilemma suggested above, Bitcoin (BTC) mining appears to represent centralized forces. This space has become a market where the three largest mining pools own more than 50% of the network hash rate. And, according to data from, the top six mining pools are up over 80% in the past three months.

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The changes that will occur after the Merger and the impact they may have on liquid stack products are difficult to predict. Although liquid stack derivatives are moving towards centralization, a positive medium-term development could come from other alternative products attracting other products and splitting the market into an oligopoly.

“Realistically, there will be many players in the ecosystem, but maintaining a high level of decentralization, especially its credible neutrality, is critical to Ethereum’s success,” said Langley, “The key to decentralization is lowering barriers to entry, including lowering collateral requirements. and technical challenges. »

Some volatility is expected next month as the hype surrounding the Merger continues to build around liquid stack products. Demand for these products has never been stronger. Further developments will determine whether one, a few derivatives or many liquid stack derivatives will manage the space.

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