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191 - Danny Ryan's Case Against Lido

Oct 9, 2023

Danny Ryan, a coordinator at the Ethereum Foundation, dives deep into the contentious debate surrounding Lido, which currently controls over 30% of staked Ether. He warns that Lido poses systemic risks to Ethereum's decentralization and governance. The discussion also covers the essential need for diversity and pluralism within the ecosystem to prevent centralization issues. As they explore the implications of Lido's dominance, they emphasize the importance of multiple stakeholders to ensure the integrity and resilience of the Ethereum network.

01:21:33

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Episode guests

Danny Ryan

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Episode notes

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Quick takeaways

Lido's dominance in staked Ethereum presents a systemic risk, potentially leading to reorganizations and censorship.

Concentration of stake above certain thresholds can pose a threat to decentralization, security, and Ethereum's credible neutrality.

Preserving Ethereum's decentralization requires embedding decentralization principles into the protocol design, fostering competition, and exploring alternative approaches like solo staking.

Deep dives

Lido's Dominance as a Systemic Risk to Ethereum: Part 1

Lido's dominance in staked Ethereum presents a systemic risk to Ethereum. If Lido exceeds certain thresholds, such as one-third, it can hold the chain's finality hostage or manipulate the fork choice, potentially leading to reorganizations and censorship. At the two-thirds threshold, Lido gains control over the entire Ethereum protocol, making it extremely centralized. Lido's unified economic incentives and potential cartel-like behavior increase the fragility of Ethereum. While some mitigators, such as permissionless validator sets and stake ETH holder veto power, could help, there is a need for alternatives and better protocols to maintain decentralization and checks and balances in the Ethereum ecosystem.

Intro

3min

Exploring Lido's Impact on Ethereum's Decentralization

5min

Lido and Ethereum: Balancing Power and Governance

8min

Emphasizing Pluralism and Resilience in Ethereum's Ecosystem

2min

Decentralization Risks in Ethereum

24min

Exploring Advancements and Risks in the Blockchain Ecosystem

3min

Risks and Realities of Lido's Dominance

33min

Exploring Liquid Staking Derivatives and Blockchain Protocols

4min

Danny Ryan is a coordinator at the Ethereum Foundation. He’s been on Bankless many times before. Usually, we’re talking about the Ethereum roadmap and what’s coming next. This time we’re talking about something different…a risk to Ethereum that Danny sees. A little over a year ago, Danny wrote a blog post titled “The Risk of LSDs”... discussing the various risk vectors that a dominant LSD presents to Ethereum…even naming Lido specifically in the process.

------ ✨ DEBRIEF | Ryan & David unpacking the episode: https://www.bankless.com/debrief-danny-ryan

------ A lot of people have decided that liquid staking with Lido is the place to do it. At the time of recording Lido has over 30% of all staked Ether. Does this present a systemic risk to Ethereum?

We did an episode called, “In Defense of Lido” with researcher Hasu who argued that Lido does not pose a systemic risk to Ethereum. In fact, Lido’s dominance is better than many other alternatives. We left that conversation half-finished when we published it in August 2023.

In today’s episode, we cover part two of that debate with Ethereum researcher and guest Danny Ryan who argues the opposite. Lido is a systemic risk to Ethereum and what to do about it.

We believe our role as podcasters for issues like this is to voice both sides of the argument in long-form conversations and healthy debate. It is exactly the kind of thing you don’t get on Twitter. That’s why we’ve given voice to both sides of this issue.

We think there are good actors who care about this ecosystem at Lido and in the broader Ethereum community and we’re sure this episode won’t be the last word on this subject.

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------ TIMESTAMPS

0:00 Intro 7:41 Is Lido a Threat to Ethereum 8:57 Blog Post Thinking Change? 19:30 Uniswap 21:20 Theoretical Main Risks 25:45 God Mode 27:20 Practical Main Risks 34:00 Hasu Counter-Arguments 38:25 Permissionless Validator Set Mitigation 42:30 Veto Power Mitigation Argument 46:55 How Likely is the Lido Risk? 51:26 Client Team Positioning 55:00 How Special is the Lido Case? 57:45 One LST Inevitability 1:02:30 Solutions 1:06:55 Profit Maximization 1:09:00 Action Steps For Ethereum Decentralization 1:11:53 Can Ethereum Devs Do Something? 1:20:10 Hasu Questions Answered by Danny 1:22:45 Magnitude of the Lido Threat 1:24:20 How Can Lido Fix This? 1:25:59 Stick & Carrot for Lido 1:26:27 Silverlining of Lido Threat 1:29:05 Next Conversations 1:32:16 Closing & Disclaimers

----- RESOURCES

Danny Ryan https://twitter.com/dannyryan

Danny Ryan Blog Post https://notes.ethereum.org/@djrtwo/risks-of-lsd

Hasu’s Bankless Interview https://youtu.be/IfuUdIblfrY

----- Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures