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Lido Operator Set Strategy - DRAFT

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Introduction

Lido’s product is dual-faceted: it provides liquid staking tokens to users and it provides operator sets which enable the liquid staking tokens to the protocols. The better the underlying operator sets are, the more robust, resilient, and performant the underlying protocol. Good operator sets boost the effectiveness of our business development efforts, increase community acceptance, and reduce protocol risks.

Trustless and decentralized sets are necessary not only for the health of the underlying network, but also for Lido to reach its full potential in terms of AUM. Our thesis is that when liquid staking wins, it wins hard. Having a robust operator set is a precondition for this success to be sustainable. The more decentralized Lido’s operator sets are, the less risky it is for an increased amount of assets to be staked with it – not only to stakers themselves, but also in terms of possible effects to integrated DeFi protocols and the underlying networks.

As a bedrock protocol, Lido must strive to ensure that the operators (and their validators) it selects or delegates to comprise a set that is net positive for the underlying protocol. While in certain cases pragmatic constraints (e.g. the possible set given the market demand for the staked token) may lead to sub-optimally decentralized, or permissioned sets, the strategy must always include a plan describing what’s required for the set to evolve into the maximally decentralized and permissionless version of itself.

In each protocol that Lido operates on, it will need to develop a tailored operator set strategy that addresses the respective staking environment, technical complexities, and community expectations. In addition, it is important for Lido to have an abstract and cohesive overall strategy that guides the specific strategies for each chain/network.

The operator strategy for each network/chain that Lido operates on should use the Core Principles as a set of base principles from which to develop specific guidelines tailored to each specific network/chain.

Core Principles

It is important to recognize that the objective of Lido is what ultimately drives both its actual usage and its import within the context of the multi-chain world that it inhabits. As we attempt to build a “better substitute” for native tokens, this means that the ultimate goal of Lido is to replace native tokens whenever possible which also means that the security, fragility, and overall ecosystem impacts of its liquid staking tokens should be as close to that of the native tokens as possible. In other words, Lido should strive to build offerings that are net-positive for the chains that it inhabits (i.e. provide value without making concessions in the health of the underlying protocol), which necessitates that ecosystem stewardship, not profitability, is our primary concern.

Lido operator set strategies should adhere to the following core principles:

  • Lido’s operator set should increase the robustness, security, reliability, and decentralization of the underlying protocol (when compared to the most likely alternative that would be created by market forces);
  • Lido’s operator set should be maximally decentralized and distributed given current network and market constraints;
  • Lido’s operator set should include considerations to mitigate the possibility of one or a select-few parties operating or controlling an inordinate amount of stake in any protocol through Lido stake;
  • Lido’s operator set should take into account ecosystem participation and stewardship, and support smaller organizations which vitally contribute to validating and staking;
  • Lido’s operator set should select for distribution and decentralization in combination with optimal performance and profitability (the former should not be sacrificed for the latter).

Lido on Ethereum Principles & Guidelines

The purpose of this section is to describe principles, guidelines, and goals of the current strategy. At the same time, we should be thinking about what the strategy for the following six months may look like, and what the strategy post-withdrawals, DVT, etc. may look like.

In addition to the Core Principles, Ethereum has an additional focus on client diversity; Lido should be a force for better client diversity.

  • Lido’s operator set should improve overall client diversity on Ethereum

  • No one node operator should have > 1% of total ETH staked via Lido

  • Node operators should run execution layer and consensus layer nodes specifically for the validators that they operate for Lido

  • Node operators should be distributed jurisdictionally

  • Validators should be distributed geographically

  • Validators should be distributed in terms of infrastructure:

    • No overreliance on cloud providers;
    • No overreliance specific data center providers.

  • Operators should be using best practices for securing their execution layer and consensus layer nodes, as well as their validator clients

  • Operators should be using best practices for key management and security of keys

  • Until withdrawals and a robust permissionless node operator registry is possible, a curated set of professional node operators, consisting of both established multi-chain operators as well as new entrants and operators who focus specifically on Ethereum, is the best way to safeguard user deposits, keys, and the exit+withdrawal process

  • Operators in the curated set should not be running white-label nodes (i.e. using another operator behind the scenes)

  • Following the possibility for triggerable exits and withdrawals, there should be a stake (re)-balancing mechanism put in place that:

    • Rewards (gives more stake to) operators who promote the above objectives;
    • Derisks (removes stake from) operators who are reaching the theoretical limit, and/or are not performing optimally, and/or whose participation negatively affects Lido’s overall effectiveness with regards to the above objectives;
    • Allows newer and smaller operators to join the set and work their way up.

  • ###### tags: node operators validators strategy principles guidelines

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