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June 24, 2022

Ethereum Staking Cap Proposed by Lido

Lido, the DeFi platform, suggested a cap on the network’s staked Ethereum share on Friday, citing a possible systemic danger presented by the coin.

Several well-known Ethereum engineers, including co-founder Vitalik Buterin, have said that no one protocol should have a majority staking ETH, according to a governance proposal presented on Friday by the fifth-largest DeFi protocol.

It is still too early to cast a vote on the proposition. First, Lido wants to determine whether or not a restriction on staking is necessary, and to what degree.

Lido Staked Ethereum (stETH) had a significant decline recently, resulting in large-scale market liquidations, prompting this suggestion. After the decline, the stETH and ETH prices diverged, which might hamper the impending integration process.

In terms of liquid staked Ethereum, Lido is by far the most popular supplier of this kind of token, which can be traded for staked Ethereum. Once the merging is active, its primary product, stETH, may be redeemed for ETH.

According to Lido’s plan, the blockchain faces an existential danger if staked Ethereum is concentrated in the hands of only one protocol.

Limiting stakes was also said to be done in good faith, believing that other liquid staking methods would do the same. Rocket Pool’s recent introduction would also enable newcomers to step in and fill any gaps in supply.

The value difference between stETH and ETH, if allowed to expand, might potentially constitute a “systemic” danger to the merger.

Lido, on the other hand, said in its proposal that if it chooses to restrict its staking exposure, a centralized exchange-led KYC standard might dominate the market.

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Other liquid staking providers may be unable to expand rapidly enough to satisfy demand, resulting in a liquidity shortage.

As Lido put it, “the winner takes all” in the market for staking derivatives might be a “winner-takes-all” situation.

The idea is now up for discussion. Lido’s future is currently in the hands of the community.