# 2022.06.16 - Proposal Discussion: LDO + stETH Dual Governance ###### tags: `Lido` `Governance` `Meeting` ### Context **Location:** Twitter Spaces, recording to be posted by Lido - https://twitter.com/LidoFinance/status/1537403348952965128?s=20&t=dgvjCJFfWSFT2LQO2d-KFw **Date:** June 16, 2022 **Participants:** - Sam Kozin (Lido core dev) - Hasu (Flashbots / Paradigm) - Nick Cannon (Gauntlet) **Reference:** Governance forum proposal - https://research.lido.fi/t/ldo-steth-dual-governance/2382(/s/template-meeting-note) --- ### Notes * Intro context on this proposal * Given amount of stake we have, something has to change with how the Lido protocol is governed * Principal-agent problem -- Lido is the agent. Stakers with Lido are principals * Stakers are aligned with ethereum protocol * For Lido, alignment with protocol is less clear -- not as clear as stakers themselves * Fears from some in ethereum community around staker coercion, censorship, MEV abuse, etc that may result from concentration * Thinking about how can we align the incentives of these two parties? Why not just find a way to make sure that these worse things cannot happen? * Potential solution --> stETH stakers get veto rights. Make it expensive enough to minimize griefing and blocking everything * Overview of dual governance proposal * Governance powered by LDO. Stakers represented by stETH * Changes proposed by LDO holders * Allows stakers to veto proposals by LDO governance * Aim is for veto power to trigger when there's protocol misalignment / instances of governance capture. Helps protect staker interests * No proposal can pass unless allowed by quorum of stakers * Lock stETH into special escrow contract. There's a delay, no instant locking * After threshold reached on locked, then switches to veto mode * Still can vote to allow specific protocol to be executed * A couple options to minimize attack surface: * Recovery from governance capture on the stETH side -- make governance griefing by stETH holders more expensive * Recovery from governance capture on the LDO side -- burning LDO effectively redistributes governance power to other voters * Application of this dual governance mechanism * Only to be applied to things that can affect stETH holders directly * Not for all decisions, i.e. treasury decisions. That said could be some ways the treasury could conceivably maybe be exploited to harm the protocol. But LDO should still ultimately be in control of how the treasury ought to be spent. On other hand, this is not unique to Lido. There are many other treasuries. * In the end, we want to ossify the protocol. Esp critical parts that can be exploited to harm the network. But we cannot do it now given the base protocol is not yet settled. * Implications for Ethereum community and stakers (native + stETH)? * What's unclear now is how this might alter time horizons of users. This makes every stETH holder consider other stETH holders. Could be longer term impact & emergent behavior * That said, even if dual governance doesn't pass and once withdrawals are enabled, stakers could still vote with their feet and unstake + go elsewhere * Implications for LDO holders? * Hasu - think proposal is very favorable. Need for the community to trust that Lido doesn't harm ethereum is clearly a huge problem for Lido. If some way to prove that this trust isn't needed, then Lido could safely scale. Encourage everyone to look into concept of governance extractable value. Governance is a major cost on protocols * Closing remarks * Sam - This is what allows Lido to grow larger. Without this, Lido can't scale. This allows scale, which drives revenue * Q&A - *[had to sign off so missed a last few mins of Q&A from the panel]* --- ### Additional questions from me * What is overlap of LDO and stETH holders? Truly separate/distinct parties or is there significant pockets of concentration anywhere? * How does this proposal reflect the fact at that LDO is a multi-chain service? What happens when stETH isn't the vast majority of LDO activity? * Let's say this proposal works as intended + Lido sufficiently diversifies its validator set: doesn't this mean that the optimal outcome for Ethereum is that Lido has to become a liquid staking monopoly given unclear how robust mechanism are with other options (CEX, etc)? * What about enshrined liquid staking? How do you think about that? Scenario where it's a de novo EIP hard fork upgrade to base protocol vs. Lido getting subsumed by Ethereum?