Lido Finance, Ethereum’s largest liquid staking platform by locked value, has introduced a proposal that empowers staked ether (stETH) holders with direct voting power alongside existing DAO tokenholders. This significant development is encapsulated in the Lido Improvement Proposal (LIP) 28, which aims to revolutionize Lido’s governance structure.
The LIP 28 outlines a dual governance system that allows stETH holders—participants who stake ETH through Lido to receive a liquid token in return—to engage in a veto mechanism on pivotal protocol decisions. Historically, governance decisions were predominantly in the hands of LDO tokenholders, the governance token of Lido. This shift marks a monumental step towards increased participatory governance within the platform.
Under this proposed system, stETH holders would be able to veto certain proposals that receive approval from LDO tokenholders. However, it is important to note that this veto power would not allow them to independently advance proposals.
This initiative is framed as a call for greater accountability and decentralization, particularly as Lido maintains a commanding position in Ethereum’s staking ecosystem. Currently, over 25% of all ETH is staked on the network utilizing Lido’s infrastructure, underscoring the need for inclusive governance.
How it Works
The dual governance system introduces a special timelock contract between the decisions made by Lido DAO and their actual execution. This mechanism provides stETH holders with a crucial opportunity to intervene should they have strong opposition to a proposal.
The timelock operates dynamically, reflecting how on-chain governance materializes behind the scenes. In the existing system, governance decisions are not instantaneous; a predetermined period precedes their execution, allowing users ample opportunity to respond to changes they may find objectionable.
However, Ethereum staking presents unique challenges, as users are unable to swiftly unstake or withdraw ETH even with the existing timelock structure. The complexities of liquidity and queuing can prolong withdrawal times significantly.
The newly proposed dynamic timelock addresses these dilemmas. It operates on the premise that if a sufficient number of dissatisfied users deposit their stETH (or wrapped stETH or withdrawal of NFTs) into a dedicated escrow contract for withdrawal, the timelock duration will begin to extend, causing the crossing of what is termed the “first seal” (designated at 1% of the total Lido ETH staked).
If discontent escalates and the deposits breach the “second seal” threshold (10% of Lido’s ETH Total Value Locked), a “rage quit” is initiated, effectively blocking the execution of the DAO’s decision until all protesting stakers have had the opportunity to withdraw their assets. This mechanism acts as a crucial safety valve, allowing stakers to express their objections and exit while simultaneously granting time for the DAO to address concerns or retract contentious decisions.
The timing of this proposal coincides with Ethereum’s impressive 30% surge over the past week, fueled by the momentum from its Pectra upgrade, which has introduced execution-layer enhancements aimed at improving scalability and efficiency. This rally has reignited interest in Ethereum-native applications like Lido, which play a vital role in capital flow and validator engagement across the chain, directly influencing ETH market dynamics.
The LIP-28 proposal is currently in the discussion phase, with an on-chain vote anticipated in the forthcoming weeks. If this proposal receives approval, it could transform governance distribution throughout Ethereum’s staking ecosystem, potentially setting a precedent for other DeFi protocols intending to engage users—not just tokenholders—in the decision-making process. Lido’s competitors, including Rocket Pool and Frax Ether, will undoubtedly be watching closely.
LDO prices have seen a noticeable rise of 6.5% within the last 24 hours, in contrast to the CoinDesk 20 Index, which has increased by 2.5%.
Read more: Ethereum Activates ‘Pectra’ Upgrade, Raising Max Stake to 2,048 ETH
