In May 2022, Protos predicted that Ethereum’s major Merge to proof-of-stake would encourage centralization. Yesterday, Ethereum Foundation’s Danny Ryan admitted to a “corporatization, a centralization, and a systemic threat.”
“What happens when a regulator realizes that three people control the vote?” Ryan wondered, adding, “I got three doors to knock on. Easy.” The three ‘doors’ in question are the three validators who now control over 85% of Ethereum’s liquid staking validation: Lido, Coinbase, and Binance.
Incredibly, in May 2022, Vitalik Buterin believed no liquid staking service would exceed 15%. With three services now owning 85%, well, that ship has clearly sailed.
Lido is Ethereum’s largest known validator. It is three times larger than the next-largest validator, Coinbase, and seven times larger than Binance. Ryan has admitted concern that Lido, Coinbase, and Binance could eventually gain control over one-third of Ethereum’s entire validator set — both liquid stakes and traditional, illiquid stakes.
Lido is the most powerful validator on Ethereum
Lido ascended to preeminence by helping users evade Ethereum’s lockup time commitment for proof-of-stake validation rewards. Rather than requiring users to stake ETH into a regular validator for months without access to their capital, Lido allows users to have their cake and eat it too. Specifically, Lido accepted ETH from depositors and immediately gives them its proprietary version of ETH, stETH, that it pledges to honor at a 1:1 peg.
Obviously, most users prefer to receive their capital back and invest it elsewhere, rather than surrender their capital entirely. Even better, Lido passes along most of the staking rewards that it earns from staking its ETH to stETH holders through a blockchain process called rebasing.
Finally and as if its offer was not already appealing enough, Lido is a full-service offering that allows everyday users to earn proof-of-stake rewards that are inaccessible to non-technically savvy ETH holders. Lido simplifies all of the complex hardware, software, and internet requirements of Ethereum validation into a simple interface: deposit ETH and receive 1:1 pegged stETH that automatically rebases to reward you. Voilà.
So, in summary, not only does Lido give users instant liquidity (stETH) for locked-up capital (staked ETH), but it also rewards stETH holders with generous APRs: currently 3.6%. Even better, Lido simplifies this entire process to a few website clicks.
Unsurprisingly, Lido has grown consistently since launch, powered by its generous offers, resilience, and stETH:ETH peg with deep liquidity. Its governance token boasts a $1.3 billion market capitalization. Its flagship liquid staking token, stETH, is worth $13.9 billion — the seventh largest crypto asset in the world.
Lido’s two tokens are approximately twice the size of Dogecoin. Excluding stablecoins, Lido is the world’s fifth-largest crypto asset. It controls 7% of all circulating ETH and two-thirds of all liquid-staked ETH.
ETH in Layer 2s are custodied in small multi-sig teams
Worse, other areas of proof-of-stake Ethereum are also centralizing. Blockchair lead developer Nikita Zhavoronkov also bemoaned Ethereum roll-ups, also known as layer 2s. “The said L2 ‘revolution’ is just a bunch of private companies trying to take over cryptos,” he posted on X (formerly Twitter) on Monday.
Indeed, all ETH in the three largest Ethereum layer 2s — Arbitrum, Optimism, and Base — are custodied in multisig wallets controlled by trusted, corporate signers. All three have promised to decentralize the these wallets into their community… sometime in the future.
Zhavoronkov continued, “Ethereum’s scaling plan is now a pile of centralized rollups with admin keys. Scaling layer 1 yields the true decentralization.”
He similarly expressed concern about Ethereum centralization in layer 2s. “Ethereum got stuck the same way Bitcoin did: its blocks became full, the devs refused to increase the gas limit. Just like Bitcoin got corrupted by centralized L2s (Lightning), Ethereum now has L2s with admin keys of its own.”
Crypto Coffee also questioned the decentralization of layer 2s. “Centralized L2s are a psyop for mainstream sellout.”
Attorney Preston Byrne agreed that most Ethereum protocols are vulnerable to subpoenas and legal action due to their centralized operators.