Original author: Lido Strategic Advisor Hasu
Compiled by: Odaily Planet Daily Azuma
Last weekend, Lido’s strategic advisor Hasu released the first updated opinion (reGOOSE #1) on Lido’s “strategic intent” (GOOSE) determined in October last year in response to changes in the market environment over the past six months.
In the article, Hasu mentioned two main challenges that Lido is currently facing:
First, researchers at the Ethereum Foundation have begun discussing a significant reduction in the staking incentives of the Ethereum network, which could fundamentally threaten the economic benefits of decentralized staking protocols such as Lido;
Second, with the development of the restaking narrative, subsidies driven by projects such as EigenLayer and LRT have attracted tens of billions of dollars in capital inflows. As a result, stETH has passively suffered a "vampire" attack, and its market share has dropped from 32% to 29%.
Faced with the above two challenges, Hasu combined his own understanding and community discussions to give his own suggestions, namely how Lido should respond to the ever-changing market trends, which aspects should actively seek change, and which aspects should stick to the original intention.
This article will focus on the second challenge mentioned by Hasu, that is, how Lido can solve the problem of "vampire" attack on Restaking. As for the first challenge, since the Ethereum Foundation has not yet reached a general consensus on whether to change the mainnet staking incentives, the proposal is still in the research and discussion stage. Hasu also believes that this proposal will not make much progress in the next 12 months, so this article will not elaborate on it. Readers interested in this part can go directly to the forum to read the original text.
The following is Hasu’s original text (all from Hasu’s first-person perspective), translated by Odaily Planet Daily.
Lido and Restaking
Restaking is a new economic model that allows the same collateral to be used in multiple validation services (called AVS in the context of Eigenlayer), thereby improving capital utilization efficiency, but due to the existence of new slashing conditions, its risk will also increase accordingly. For example, the same ETH can be used as a staked asset for Ethereum PoS validation and can also be used to run a data availability node (such as EigenDA).
I discussed the Restaking narrative when Lido was developing GOOSE last October. My view at the time was that this is indeed a promising underlying technology, but it may take several years to fully mature. Restaking brings new risks due to the existence of additional penalty conditions, but the returns from the AVS service are negligible at the beginning.
However, the above analysis ignores the possibility that EigenLayer can hype the narrative in the pre-release stage and use the points subsidy to attract capital inflows in advance. At the time of writing, users have deposited a total of about 5 million ETH (worth about $15 billion) into EigenLayer, most of which came in even before the AVS service was launched. In addition, since the liquidity re-staking protocol (LRT) around EigenLayer and some other AVS partners also have their own subsidy plans, this has also helped to further increase the incentives for the Restaking narrative.
Although these subsidies are destined to be unsustainable in the long run, the current situation is that a large number of staking users have begun to choose the higher returns of Eigenlayer + LRT rather than the higher security of stETH and its network effects.
In response to this situation, I will put forward update suggestions for GOOSE from the following three aspects.
stETH should continue to exist as LST and should not be transformed into LRT
Despite the current popularity of the Restaking/LRT narrative, I still believe that stETH should not be converted to LRT for two reasons.
First, as mentioned in the original version of GOOSE, it is expected that more institutional capital rather than retail capital will join Ethereum in the next three years. If Ethereum's staking layer wants to remain sufficiently decentralized, it will be crucial for Lido or other decentralized staking protocols to win the favor of institutions. In my personal experience, the higher risk and actively managed nature of LRT do not meet the risk preferences of institutions. For stETH, the massive accumulation of funds will make it the safest and most liquid LST, and converting to LRT and adding additional risks will undermine this foundation.
Secondly, although LRT can provide higher yields, its nature is closer to ETH-denominated mutual funds (mutual funds) or tokenized deposits in the lending market. The key attribute of liquidity staking is that it is a commoditized software product, but for LRT, most people in the market may have difficulty matching their risk and return preferences. Therefore, LRT is unlikely to achieve significant network effects and deep liquidity, which will further limit its adoption. Furthermore, the actively managed nature of LRTs may also result in them being more susceptible to being treated as regulated financial services.
However, Lido should remain open to the possibility of building additional products (such as LRT) on top of stETH, as long as the market demand for the product is consistent with Lido's vision. However, stETH itself, as the cornerstone of Lido, should always remain LST.
Seek staking services that can remove slashing risks, such as “pre-confirmation”
Leaving LRT aside, we can also explore stETH’s use cases more deeply around validator services for two reasons.
One reason is that AVS can be roughly divided into AVS that requires validators and ASV that does not require validators, the latter of which can operate based on any type of collateral.
Second, not every validator service requires a slashing mechanism to operate. In other words, the slashing risk can be isolated so as not to affect stETH holders.
I believe Lido should continue to be at the forefront of defining what staking is, actively explore validator services that contribute to Ethereum's expansion or security vision, and thereby gain the support of the Ethereum community.
In 2022, Lido became the first staking protocol to commit to using mev-boost (extra-protocol PBS) in all nodes. Its comprehensive strategy achieved a good balance between MEV maximization, node selection, and censorship resistance, and had a positive impact on the staking services of the entire industry.
Running mev-boost is now a regular part of staking operations, demonstrating that the definition of “what counts as staking” can extend to many additional services.
In my opinion, pre-confirmations will be the next widely adopted validator service after mev-boost (although I expect them to be an evolution of mev-boost rather than a replacement). Pre-confirmations allow validators to commit to including an additional transaction in addition to all the transactions in the current block, so that Rollup or DEX transactions can be ordered faster (vs. 12 second next block time), improving multiple aspects of user experience, security, and interoperability.
Lido should become a leader in "pre-confirmation" services and start looking for partners. It is also important to note that Lido should achieve this goal by using special funds set up for each new service, rather than choosing options that will bring additional risks to stETH holders.
Pushing stETH to become the top collateral in the Restaking market
In addition to exploring validator services internally that align with Ethereum’s vision (such as “pre-confirmations”), it would also be an opportunity for stETH to become the number one collateral for various AVS that either do not require validators or cannot be built within the protocol because the risks are too high or they do not align with Ethereum’s vision.
This choice is in line with the basic principle of "maintaining stETH as the safest and most Ethereum-friendly LST". Lido should not enter the field of active risk management, but should find a way for stakers to choose a higher risk/return model by depositing stETH into the Restaking protocol or AVS.
This requires building a thriving ecosystem of applications and partners around stETH, similar to what Lido has done through integration into Ethereum DeFi and the broader CeFi space, which falls into the category of ecosystem building. This also requires Lido to have a deep understanding of the AVS and LRT ecosystems, build connections with key players in the system, and align incentives through collaboration.
Given Lido’s historically poor performance in negotiating strategic partnerships, I recommend creating a new ecosystem building team within Lido for this purpose.
