Lido Takes Initial Step to Decentralize Ethereum Node Operator Set Amid SEC Allegations - Unchained

Lido Takes Initial Step to Decentralize Ethereum Node Operator Set Amid SEC Allegations – Unchained

Monday saw the debut of Lido’s Community Staking Module on the Holesky test network, which aims to allow new entities, including solo stakers, to become node operators without needing permission from its DAO.

Lido Takes Initial Step to Decentralize Ethereum Node Operator Set Amid SEC Allegations - Unchained PlatoBlockchain Data Intelligence. Vertical Search. Ai.

Lido jumpstarted the liquid staking ecosystem in 2020 by introducing its flagship product, stETH, a rebasing token representing a person’s principal amount of staked ETH and their rewards from helping secure the Ethereum blockchain network.

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Posted July 2, 2024 at 6:55 pm EST.

As it faces allegations by the U.S. Securities and Exchange Commission, liquid staking leader Lido is preparing to become more decentralized by taking a step toward integrating a more diverse set of Ethereum node operators, such as solo stakers, the “gold standard” for staking, per the Ethereum Foundation.

On Monday, a Lido initiative called Community Staking Module, which is expected to allow permissionless entry for node operators, activated on the Holesky test network, according to a governance post in Lido’s forums by Dmitry Gusakov, the tech leader of Lido’s community staking product.

The move comes days after the SEC implied in a lawsuit against Ethereum software provider Consensys that Lido’s liquid staking token, stETH, is an unregistered security. Staked ETH, aka stETH, represents a person’s principal amount of staked ETH and their staking rewards from helping secure the Ethereum blockchain network. 

Lido’s stETH has a market cap of $33 billion, making the liquid staking provider the leading DeFi protocol by total value locked. According to a Dune Analytics dashboard by crypto analyst Hildobby, Lido commands a 29% share of the total 33.3 million staked ETH.

The advent of Lido’s community staking module marks a change to the protocol that first introduced liquid staking in 2020, because Lido on Ethereum has had a curated and permissioned validator set since its inception, in which those interested in acting as a node operator for Lido had to be vetted by the Lido DAO.

Read More: How Liquid Staking Works

Permissioned and Restricted Since Inception

Unlike its competitor Rocket Pool, before a node operator can conduct validator operations for Lido, governance has to vote on whether to include a prospective address into Lido’s active set of node operators. At presstime, Lido has 39 node operators, which includes the likes of P2P.org, Chorus One, and Consensys. 

The initiative centered on permissionless entry allows “any node operator – and especially community stakers, from solo stakers, to groups of friends, to amateur operators – to operate validators by providing an ETH-based bond (security collateral),” according to its documentation.

The new community module is expected to make solo staking more accessible through its inclusion of several features such as a low bond for node operators as well as smoothed rewards from Ethereum’s execution layer and maximum extractable value. 

Decentralization as an Escape From the SEC?

The initiative comes several days after the SEC charged Consensys for offering and selling unregistered securities, namely Lido and Rocket Pool’s liquid staking tokens, through Metamask, a crypto wallet where people can stake and swap cryptocurrencies. 

Consensys, which is also a node operator for Lido, “has offered and sold tens of thousands of unregistered securities on behalf of liquid staking program providers Lido and Rocket Pool, who created and issue liquid staking tokens (called stETH and rETH) in exchange for staked assets,” the SEC’s press release states

Read More: Could the SEC Have a Case Against Liquid Staking Protocols?

The complaint calls Lido and Rocket Pool issuers of unregistered securities, alleging that their staking programs “are each offered and sold as investment contracts and, therefore, securities.” 

Following the prongs of the so-called Howey test, which, since a 1946 court case, has been the legal measure to determine whether an investment is a securities offering, the agency said these liquid staking tokens meet the criteria. 

In its press release, it said the buyers of LSTs “make an investment of ETH in a common enterprise with a reasonable expectation of profits from the managerial efforts of Lido and Rocket Pool, respectively.” However, neither Lido nor Rocket Pool has filed registrations to offer these securities with the SEC. 

With the fourth prong of the Howey test being “the managerial efforts of others,” crypto projects have sought to be decentralized enough that such a third party could not be easily named. 

LDO, the governance token for Lido, has decreased 6.3% in the past 24 hours and 19.7% over the last 30 days to trade at $1.92, making its market cap stand at $1.7 billion, per CoinGecko.

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