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Lido Seeks to Reform Voting With Dual Governance

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Lido Seeks to Reform Voting With Dual Governance


Key Takeaways

  • The Lido community is considering a new approach to protocol decision-making called “dual governance.”
  • Currently, only LDO holders can vote on decisions; the new approach would give stETH holders veto rights as well.
  • The plan also seeks to solidify parts of the Lido protocol by placing them outside the control of the Lido DAO.

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The Lido community is discussing a potential change in governance that would utilize both of its main tokens.

All Holders Could Have a Governance Role

The Lido community’s suggested approach is called dual governance, and it aims to resolve conflicts of interest between holders of staked ETH (stETH) and Lido (LDO) tokens.

The proposal initially aims to “introduce a dispute and resolution mechanism for misaligned incentives” by giving both types of asset a role to play in governance decisions.

At present, only those who hold the Lido DAO token (LDO) have the right to participate in governance. This means that LDO holders have collective control over most technical aspects of the protocol. As such, they could potentially collude to upgrade the stETH contract in a way that exploits stETH holders.

StakedETH (stETH) tokens are distributed to users who deposit ETH and are meant for use on DeFi services. The new proposal would add an additional governance role for these assets: stETH tokens would hold veto and anti-veto powers, giving holders the ability to counter the decisions of the Lido DAO.

This approach would create a “checks and balances” system seen in many world governments, which rely on the separation of powers to prevent hazardous decisions from coming into law.

In addition to introducing this dual voting system, the proposal aims to “reduce the scope of governance … via ossification.” This means the proposal would solidify some of the parameters of the protocol—unchangeable to even the Lido DAO itself.

However, ossification will not immediately be possible, and the proposal will focus on dual governance at first.

Plan Is Well-Regarded, But Not Final

Sam Kozin, Lido’s Lead Smart Contract Developer, put forward a concept for dual governance on Jun. 10. The team must still create a more technical version of the proposal before a vote takes place. No date for voting has been announced yet.

The proposal has been well-received within Lido and associated circles. Lido co-founder Cobie (Jordan Fish) stated that “the goal of LDO should be to minimize its own ability to influence over time.” He added that this relinquishing of power will result in “the highest growth [and] longevity potential.”

Some have suggested that the plan marks an entirely new approach to DeFi governance. Hasu, a Paradigm-based researcher who co-authored the protocol, called it a “revolutionary proposal for Lido Finance and DeFi in general.”

Lido is slowly becoming a victim of its own success, as more than 30% of the total ETH supply has been staked through the protocol. This has created concerns about the power the protocol may have over the Ethereum network itself.

The Lido community also considered limiting the protocol’s share of ETH in May to confront that problem.

Disclosure: At the time of writing, the author of this piece owned ETH and several other cryptocurrencies.

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