Lido Finance, recognized as the largest liquid staking platform on the Ethereum 
$2,543 network, has recently introduced a new proposal. Through Lido Improvement Proposal (LIP) 28, staked ether (stETH) holders are offered governance rights, which were previously exclusive to Lido’s governance token (LDO) holders. The proposal aims to foster accountability and decentralization in protocol decision-making.
Details of the Dual Governance System
The newly introduced system grants veto rights to stETH holders on proposals approved by LDO holders. However, this mechanism does not allow stETH holders to propose or pass new proposals directly. It provides them the opportunity to block only undesired decisions, aiming to balance governance. Considering that Lido’s infrastructure stakes over 25% of the total Ethereum supply, the direct consideration of stakers’ demands and rights marks a significant development.
Another notable aspect of the proposal is a contract function referred to as the “dynamic time lock.” This mechanism acts as a mediator in Lido DAO’s decision implementations. Decisions are not executed immediately, allowing time for users to object to certain changes. During this period, discontented users have the chance to object or exit the platform.
Dynamic Time Locks and Security Mechanism
In the Ethereum staking system, the inability to quickly withdraw staked assets posed a risk to the platform. The new proposal aims to offer a security valve for stETH holders. If the number of dissatisfied users reaches a certain threshold, the time lock mechanism is triggered, delaying the proposal’s execution.
The proposal includes two thresholds known as the “first seal” and the “second seal.” If 1% of total stETH is deposited in a protest intermediary contract, the first seal activates, extending the time lock. If this percentage reaches 10%, the “rage quit” mechanism triggers, halting the decision until all opposing users withdraw their assets.
The potential impact of this mechanism on the platform lies in offering users a stronger voice of opposition. By participating in protests, stakers can safely exit from undesired decisions, while the DAO can reconsider or cancel the implementation.
Repercussions in the Market and Ecosystem
The recent Pectra upgrade in Ethereum has increased platform success, simultaneously renewing interest in liquid staking applications associated with Lido. The new governance proposal has opened discussions in tandem with this rise. Such innovations within the Ethereum ecosystem could enhance user participation and governance diversity. Lido’s model might serve as an example for similar platforms in the DeFi space.
Among competing platforms, Rocket Pool and Frax Ether are mentioned, with expectations that governance rights could be more broadly distributed among users in the Ethereum staking ecosystem if the proposal is approved. LIP-28 is still under discussion and will soon be put to an on-chain vote.
Lido Finance’s team stated, “The dual governance system aims to enhance user participation by granting veto rights to stETH holders, thereby establishing a more balanced protocol structure.”
Recently, LDO saw a 6.5% price increase. In the same period, the crypto market’s general index rose by 2.5%. Such developments are closely monitored for their impact on governance dynamics within Lido and the broader Ethereum ecosystem. Active user participation in governance could lay the groundwork for long-term commitment and trust in protocols. If the proposal is accepted, it’s believed other decentralized finance protocols might adopt similar innovations in their governance models.
