Lido DAO Proposes Governance Switch Up

The DAO overseeing Lido, the largest provider of staking services for Ethereum, has proposed a switch up of its governing system to “reduce the existing scope of governance” for its token holders.

Lido DAO, a decentralized autonomous organization, is governed by the holders of the DAO’s governance token, LDO — holders participate in transparent on-chain voting to decide on platform parameters and proposals. 

Although the Lido DAO is currently deployed on Ethereum, LDO holders possess governance power over liquid staking protocols on other chains, including Polygon and Solana.

Under the DAO’s current multichain governance system, LDO holders have incentives related to other chains, which are “not necessarily aligned with those of Ethereum network participants,” Sam Kozin, lead smart contract developer at Lido, wrote in a blog post. 

To solve this problem, the Lido team has proposed a dual governance solution that sits between LDO holders and stakers. The proposal will introduce “a dispute and resolution mechanism for misaligned incentives between stakers and LDO holders.” 

“This [resolution] mechanism is designed to be triggered when LDO governance becomes captured as a result of attacks or misaligned with stakers and the network, because this mechanism allows two stakers to block governance decisions, it has the effect of disincentivizing LDO governance from executing decisions that go against the stakers interests,” Kozin said during a Twitter spaces event on Thursday, held to discuss the dual governance proposal.

During the general decline in the crypto market, Lido’s staked ethereum (stETH) tokens have been losing value, relative to ether, and this split has contributed to a liquidity squeeze in the crypto market. Although each stETH token is fully backed by ether locked in Ethereum’s Beacon Chain, stETH will not be redeemable for ether on a 1:1 basis until after the blockchain’s Merge and a subsequent network upgrade to enable withdrawals projected to occur sometime in 2023. As a result, stETH is trading below 0.94 ETH per token as of Friday at 8:00 am ET, exacerbated by heavy selling from struggling crypto hedge fund firm Three Arrows Capital.

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Hasu, a prominent though pseudonymous blockchain researcher and strategic adviser to Lido, believes that for the protocol to grow and capture more revenue, “the community, the team developers need to trust that Lido isn’t something that will harm Ethereum.”

“The more governance power you have in your protocol, the more the governance and participants are incentivized to exploit and extract money from it by doing something that’s against the protocol,” Hasu said. “Less governance will make it easier for people to trust us and will save us a lot of money.”

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