Lido Proposes Limit On Ethereum Staking, Here’s Why

DeFi platform Lido on Friday proposed a limit on the platform’s share of staked Ethereum, citing a potential systematic risk from the token, among other factors.

In a governance proposal put forward on Friday, the fifth-largest DeFi protocol said that multiple prominent Ethereum developers, including co-founder Vitalik Buterin, have argued that no single protocol should have a majority in staking ETH.

Voting on the proposal has not opened yet. Lido wants to first establish whether a limit on staking would be desirable, and to what extent the limit should be placed.

The proposal comes a few weeks after a sharp fall in Lido Staked Ethereum (stETH) caused mass liquidations in the market. The fall caused a divergence in stETH and ETH prices, which could complicate the upcoming merge.

Lido is by far the biggest provider of liquid staked Ethereum, which is a tradeable class of token that represents staked ETH. stETH- its main product- can be redeemed for ETH once the merge goes live.

The argument for limiting Ethereum staking

In its proposal, Lido argues that the saturation of staked Ethereum towards one protocol poses an existential threat to the blockchain, given that it would give the protocol more voting power.

It also argued that limiting staking would be done on good faith that other liquid staking protocols would also limit their exposure. This would also allow newcomers, such as the recently launched Rocket Pool, to rise to meet the supply shortfall.

stETH, if allowed to grow, could also pose a “systemic” risk to the merge due to the divergence in value between it and ETH.

Possible risks from Lido limiting exposure

On the flipside, Lido argued in its proposal that there is a risk that a centralized exchange-led KYC standard could dominate the market if it were to choose to limit its staking exposure.

There also lies the possibility that other liquid staking providers would not be able to scale quickly enough to meet demand, causing a liquidity crunch.

Lido also argued that the staking derivatives market could be a “winner-takes-most market,” and that it should capitalize on its market dominance.

Discussion over the proposal was just opened. It is now in the community’s hands to decide where to take Lido.

With more than five years of experience covering global financial markets, Ambar intends to leverage this knowledge towards the rapidly expanding world of crypto and DeFi. His interest lies chiefly in finding how geopolitical developments can impact crypto markets, and what that could mean for your bitcoin holdings. When he isn’t trawling through the web for the latest breaking news, you can find him playing videogames or watching Seinfeld reruns.
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