Will the SEC's heavy blow to CEX accelerate the centralization of Lido's pledge?

Author: Jack Inabinet

Compilation of the original text: Deep Tide TechFlow

For months, staunch supporters of ethereum’s decentralization and holders of small-cap LSD tokens have been patiently waiting for what crypto analysts saw as the inevitable: an outflow of Lido staking shares.

Many believe that enabling withdrawals during the Shapella upgrade will help decentralize Ethereum’s staked shares. Unfortunately, reality didn't match up with this conjecture, and now, with the more established Lido controlling 1/3 of all staked ;ETH, alarm bells are starting to ring in the Ethereum community.

Today, we’ll explore why the SEC’s attack on exchange staking will only further benefit Lido, and explain why Lido’s staking centralization must now be disrupted.

Regulatory push

Just last week, the SEC launched attacks on Binance and Coinbase. The scope of the charges the two exchanges face varies, but a common theme runs through both complaints: The SEC is going after the two centralized exchanges for their staking services to their U.S.-based users.

By offering a very competitive staking product similar to Lido, Binance and Coinbase control 15.3% of all ETH staked to the Beacon Chain;

Although the SEC complaint today does not address Ethereum staking solutions, the agency has shown its willingness to go after Ethereum staking. Back in February, Kraken was forced to terminate its Ethereum staking service for U.S.-based users due to a settlement with the SEC, which the Gensler chairman claimed “should alarm everyone in the market.”

If the SEC crackdown continues, the resulting deposit landscape will become more concentrated and will likely see Lido capture a larger share of the Ethereum staking market.

Despite allowing withdrawals, Lido has maintained its dominance in Ethereum staking, adding nearly 900,000 ETH (14.3%;) this month. Since Shapella, Lido's market share has grown from 31.4%; to 31.6%;, proving that the protocol has gradually turned its past success into continued dominance in the future.

Lido continues to benefit from the natural advantages of its ETH staking derivatives and ability to undercut competitors' fee structures.

Token Advantages

Holders of stETH benefit from the deep liquidity of the token — making it one of the few viable liquid staking options for whales. With the widespread staking integration in DeFi increasing the use cases of the token, it further solidifies the superiority of Lido staking derivatives over other tokens.

Since stETH has certain qualities that make it more attractive than regular LSD, capital (especially complex capital looking for the best combination of investment attributes) will continue to flow into the token, further cementing the advantages of Lido's staking derivatives over Traits of other tokens.

Fee Structure

Lido currently offers the lowest fees of any blue-chip staking provider, which means financial incentives are actively driving stakers to Lido!

As more and more stakers flock to Lido, the gap between Lido and its closest competitors will only widen over time, with Lido cutting out competitors while reducing its share of staking rewards ,increase profit.

There are obvious parallels to Lido in the world of TradFi. Vanguard revolutionized the investing world in the 1980s with the low-cost passive index giant, consistently lowering competitors' fees in a race to the bottom, and was able to maintain an advantage for nearly half a century. Lido is borrowing directly from this strategy.

Break Lido's staking centralization

Lido governance has shown apparent indifference to the existential threat posed by its climbing staking accumulation, and voted overwhelmingly against self-limiting deposits in June 2022.

At first glance, this may appear to be against the best interests of LDO token holders and hurt Lido's profitability, however, the consequences of failing to self-limit are also very real as stakes accumulate further.

There is growing support in the ethereum community for restrictions on Lido, with some arguing that if they refuse to self-restrict, the community should force a cleanup. While worrisome, it is unlikely that such controls will be enforced at the grassroots level, as this would require a hard fork, which would jeopardize Ethereum's fragile social consensus layer and potentially lead to a highly undesirable chain split.

The Lido community should worry about the prospect that its staking centralization will translate into a dampening of future demand for Ethereum blockspace.

The protocol is approaching the first of three critical thresholds that reduce core properties of ethereum’s value proposition, giving would-be attackers greater control over the chain. If Lido continues to grow at an unchecked rate, it will inevitably exceed these thresholds and pose a systemic risk to the ecosystem.

In past bull markets, narratives like decentralization and censorship resistance gave way to hot trends. There has never been a better time to protect the fundamental properties of the Ethereum network than a bear market. Without aggressive efforts to break Lido's dominance, the staking provider will likely continue to increase its market share.

So, how do you get involved? Luckily, the battle in the cryptocurrency space is for everyone, and you don’t need to be a whale to participate in the decentralization of staking ETH. First, don't use Lido for staking.

Consider using Swell for staking, and try to qualify for the SWELL airdrop, or use at least 8 ETH to build your own small Rocket Pool pool, and get increased returns by charging commissions for the Ether pledged by your node, or deposit your Ether LSD Into unshETH, to enhance rewards with token incentives. For tech-savvy users, it is recommended to run your own validator.

Regardless of what you do, moving your stake away from Lido will help in this battle against centralization, but financial power alone won't stop Lido from continuing to dominate; now is the time to follow the lead of the activists and speak out!