Ethereum
Lido Takes First Step to Decentralize Ethereum Node Operator Amid SEC Allegations
Monday saw the launch of Lido’s community staking module on the Holesky testnet, which aims to allow new entities, including solo stakers, to become node operators without needing permission from its DAO.
Lido relaunched the liquid staking ecosystem in 2020 by introducing its flagship product, stETH, a rebasing token representing the principal amount of ETH staked by an individual and their rewards for helping secure the Ethereum blockchain network.
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Posted on July 2, 2024 at 6:55 p.m. EST.
Faced with allegations from the US Securities and Exchange Commission, the leader in liquid staking Pool is preparing to become more decentralized by taking a step toward integrating a more diverse set of Ethereum node operators, such as solo stakers, the “gold standard” of staking, according to the Ethereum Foundation.
On Monday, a Lido initiative called Community Staking Module, which is expected to allow permissionless entry for node operators, was activated on the Holesky testnet, according to a press release. governance position in the Lido forums by Dmitry Gusakov, the technical lead for Lido’s community staking product.
The move comes days after the SEC implied in a lawsuit against Ethereum software provider Consensys that Lido’s liquid staking token, stETH, was an unregistered security. Staked ETH, aka stETH, represents the principal amount of a person’s staked ETH and their staking rewards for helping secure the Ethereum blockchain network.
Lido’s stETH has a market cap of $33 billion, making the liquid staking provider the top DeFi protocol by total value locked. According to a Dune Analytics Dashboard According to crypto analyst Hildobby, Lido holds a 29% share of the total 33.3 million ETH staked.
The advent of Lido’s community staking module marks a shift from the protocol that first introduced liquid staking in 2020, as Lido on Ethereum has had a curated and permissioned validator set since its inception, where those who wish to act as a node operator for Lido must be vetted by the Lido DAO.
Learn more: How Liquid Staking Works
Allowed and restricted from the beginning
Unlike its competitor Rocket Pool, before a node operator can conduct validator operations for Lido, governance must vote on whether or not a potential address should be included in Lido’s active pool of node operators. At press time, Lido has 39 node operatorswhich includes companies such as P2P.org, Chorus One and Consensys.
The permissionless entry-centric initiative allows “any node operator – and especially community stakers, from solo stakers to groups of friends to hobbyists – to operate validators by providing an ETH-based collateral (security guarantee),” according to its Documentation.
The new community module is expected to make solo staking more accessible through the inclusion of several features such as low obligation for node operators as well as smoothed rewards from Ethereum’s execution layer and maximum extractable value.
Decentralization as a way to escape the SEC?
The move comes days after the SEC charged Consensys with offering and selling unregistered securities, namely Lido and Rocket Pool’s liquid staking tokens, through Metamask, a crypto wallet where people can stake and trade cryptocurrencies.
Consensys, which is also a node operator for Lido, “offered and sold tens of thousands of unregistered securities on behalf of liquid staking program providers Lido and Rocket Pool, which created and issued liquid staking tokens (referred to as stETH and rETH) in exchange for staked assets,” according to the SEC’s press release. States.
Learn more: Could the SEC Have a Case Against Liquid Staking Protocols?
The complaint characterizes Lido and Rocket Pool as issuers of unregistered securities, alleging that their staking programs “are each offered and sold as investment contracts and, therefore, securities.”
Under the so-called Howey test, which since a 1946 court case has been the legal measure for determining whether an investment is a securities offering, the agency said these liquid staking tokens meet the criteria.
In its press release, the company stated that LST purchasers are “making an investment in ETH in a common enterprise with a reasonable expectation of profits from the management efforts of Lido and Rocket Pool, respectively.” However, neither Lido nor Rocket Pool have filed registrations to offer these securities with the SEC.
The fourth prong of the Howey test being “the management efforts of others,” crypto projects have sought to be sufficiently decentralized that such a third party cannot easily be named.
LDO, Lido’s governance token, has declined 6.3% in the past 24 hours and 19.7% in the past 30 days to trade at $1.92, bringing its market cap to $1.7 billion, according to CoinGecko.
