Lido Shutting down several public chain services, even within the Ethereum ecosystem, is not well-received.

Lido's Decision to Discontinue Multiple Public Blockchain Services, Even Within Ethereum Network, Receives Backlash

Author: Chloe, LianGuaiNews

While just recently being criticized by the Ethereum community for being too monopolistic and not agreeing to a proposal that would restrict ETH staking to below 22%, Lido abruptly terminates its operations and cuts off services to several other blockchains like Polkadot, Solana, and Polygon. What is Lido up to with this move? It’s a mystery!

Polkadot and Solana are out, Lido leaves everyone confused

On October 17th, a member of Lido Finance’s community, kentie, proposed to shut down Lido’s services on Polygon in order to focus on being a native ETH liquidity staking provider and avoid the risks associated with a smaller Total Value Locked (TVL). This proposal to terminate Lido’s services on Polygon clearly highlights the concerning nature of the current situation.

Although Lido has around $86 million TVL on Polygon, the fees collected by Lido DAO on Polygon amount to only $116,863 per year. Additionally, Lido has rewarded Shard Labs, a provider of liquidity staking solutions, with 450,000 LDO tokens (Shard Labs introduced Lido to Polygon to enable users to stake MATIC tokens in a decentralized manner) as compensation for achieving the 3% market share milestone for staked MATIC.

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Furthermore, according to Shard Labs’ proposal for a high compensation structure, an additional 150,000 LDO tokens will soon be distributed to Shard Labs to achieve the milestone of a 4% market share for staked MATIC. The total cost of these two events amounts to 600,000 LDO tokens.

Not only do cost issues arise, but there are also reputational risks for Lido, as seen with recent technical vulnerabilities on Lido due to upgrades on Polygon. Moreover, as Polygon moves to its new native token POL (replacing the original native token MATIC) and undergoes several years of technological architecture overhaul, there are even greater uncertainties surrounding the chain.

This departure from staking is not unique to Polygon this year.

In March, Mixbytes, an auditing company for smart contracts that collaborated with Lido, announced that as of August 1, Lido would no longer provide technical and development support for Polkadot and its canary network, Kusama. From March 15, they also stopped accepting any new DOT into the Lido protocol.

MixBytes is a DeFi application developer that assisted Lido in creating liquidity staking services on Polkadot and Kusama. Kosta Zherebtsov, the product manager at MixBytes, stated in their proposal earlier this year that this decision was made due to several challenges, including market conditions, protocol growth, capacity limitations, and adjustments to company strategy priorities.

Following that, Solana faced a similar situation. On September 4th, P2P Validator, the development team responsible for Lido on Solana, revealed their current financial situation to the community and proposed a fundraising proposal to Lido DAO. The initial collaboration aimed to complement each other’s strengths and enhance their positions within the cryptocurrency community. However, despite Solana investing over $700,000 in Lido for development and maintenance, the revenue so far has only been around $220,000, resulting in a loss of $484,000.

Meanwhile, P2P Validator’s proposal offers the community two options. First, Lido DAO will provide a total of $1.5 million in funding over the next year for development costs and partnership establishment. Second, gradually halt Lido services on Solana over the next 5 months, initiating the sunset process for Lido on Solana, similar to what is happening with Lido on Polkadot and Kusama. The proposal also states that P2P Validator hopes that with this funding, Lido can capture over 1% of the Solana staking market share, which is expected to generate stable revenue of approximately $200,000.

However, the community voting results that ended on October 6th show that as high as 92.7% of participants voted in favor of stopping the protocol. Lido on Solana is gradually entering the shutdown process. On October 16th, Lido announced that it would stop accepting new staking on Solana, and its project on Solana will be gradually terminated in the coming months.

Also facing resistance from the Arbitrum community, Lido’s future is uncertain

With Ethereum transforming into a fully proof-of-stake blockchain in the past year, Lido’s astonishing rise has been evident to everyone. For many users, Lido’s approach is more appealing than setting up validators and locking ETH to the main blockchain, which involves complex technicalities.

The problem lies in Lido becoming too popular, approaching the 33% threshold of total ETH proof-of-stake, theoretically posing a threat to the demand of the majority, which is 67%. Now, there are signs of resistance from various crypto communities and Lido itself.

Last week, the voting for Arbitrum’s short-term incentive program concluded, with 57 out of 97 proposals approved. Native projects on Arbitrum received the most support, while Lido became the most controversial project in the vote. Although it received more than 200 million ARB votes, its requested incentive proposal of 4 million ARB was not approved. Opponents argue that Lido did not provide incentives equivalent to the 4 million ARB on Arbitrum; 4 million ARB is too much for a non-Arbitrum project; and some also question whether Lido poses systemic risks to Ethereum.

However, Lido supporters believe that the protocol simply makes full use of blockchain incentives and innovation, and the real threats should come from more centralized participants, such as large crypto exchanges. According to a report by Messari, Lido has been subject to external regulations (as evidenced by their growth) and must act responsibly. However, the external world does not necessarily recognize whether Lido’s existence somewhat enhances Ethereum’s decentralization.

Clearly, the Lido community is not afraid to make significant decisions for the product. Recently, severing ties with Solana and subsequently Polygon is a prime example.

But now Lido is facing operational issues. Based on the aforementioned reasons, the Lido community believes that Polygon has no commercial value in this field. Therefore, community member Kentie suggests discontinuing operational services on Polygon and focusing on making Lido a native ETH liquidity staking provider. But is this strategy really feasible?

Lido can be said to have seized the opportunity to enter the market and meet the two core needs of capital for liquidity and returns. Therefore, there is nothing wrong with completely binding ETH to become its native staking provider. However, once Lido chooses to bind ETH, Vitalik and some mainstream figures who often make a big deal online about Lido’s high market share will bite back. This will pose a threat to the centralization mechanism of Ethereum when Lido is about to approach the first security line of 33% of the total staked amount.

It is estimated that Lido may have two directions. First, acknowledge that Lido has reached its ceiling, with stagnant growth numbers. However, this will add to the previously broken sources of income from Solana and Polygon, and the ETH staking balance has reached equilibrium, making it impossible for new funds to enter. There are also many obvious risks, such as the verification limit, which will force the interest rate to be lowered to 3%, deepening the pessimistic outlook for Lido.

Second, ignore the voice of the community, break the 33% rule, or return the inflow and interest rates of ETH staking to a state of rapid increase. However, the probability of this happening is low. CoinDesk’s exchange FalconX pointed out that since Ethereum merged and transitioned to proof-of-stake and the Shapella upgrade in September 2022, there has been a surge of interest in staking, but what followed that enthusiasm was a gradual decline.

However, if you are optimistic about ETH’s dominance and a return to a bull market in on-chain transactions, there may be a turning point in this area. In short, some community members still believe that the current situation is that the ETH ecosystem is supporting Lido’s operations. However, conversely, Lido also faces uncertainties in ETH, especially doubts and suppressions regarding its centralization. Lido should consider deploying across multiple networks to increase resilience and reduce risks. But looking at the examples of Solana and Polygon, there is still a long way to go to achieve multi-chain liquidity staking.

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