Lido's proposal to give stETH holders veto power – dubbed LIP-28 – is getting a lot of buzz, and understandably so. On the surface, this seems like a positive move towards advocating more decentralization. The crypto holy grail. Not so fast. Let’s pump the brakes, step back and look at the other side of the equation. We’re instead talking about a system where holders of staked ETH can veto decisions taken by holders of governance LDO tokens. This holds even if they don’t have the foresight or technical knowledge to operate a sophisticated DeFi protocol. Is this truly progress? Or are we just laying the groundwork for anarchy?

** stETH Holders: Benevolent Stewards?**

The assumption here is that stETH holders will behave rationally and with the best interest of the protocol in mind. Human nature doesn’t operate on a schedule, does it? We’ve seen thousands of iterations of this across crypto and traditional finance. In these circumstances, temporary avarice or hysteria usually weighs more heavily than prudent decision-making. What happens when a vocal minority of stETH holders is deceived by bad information—or worse—by a coordinated attack? Or they might set off the “rage quit” mechanism, resulting in a full-scale revolt.

Think about it: the "first seal" is triggered when just 1% of total Lido ETH staked is deposited into an escrow contract for withdrawal. That's a pretty low bar. And the “second seal,” which in practice prevents the DAO decision from going through, needs to be set at just 10% of Lido’s ETH TVL. In this case, a fairly small number of stETH holders could completely lock up the protocol in a hostage state.

  • Scenario 1: The Twitter Mob. A viral tweet claiming Lido is "unsafe" (true or not) could trigger a mass exodus of stETH, even if the underlying fundamentals remain strong.
  • Scenario 2: The Whale Games. A large stETH holder, seeking to manipulate the market or exert undue influence, could strategically trigger the timelock to force concessions from the DAO.

In this way, the “rage quit” functionality is as empowering as it is problematic. From one perspective, it offers an important counterbalance to the authority that LDO token holders wield. On the one hand, it is a life raft to many who otherwise face the significant risk of destabilizing outflows. Imagine instead an equally controversial proposal that only modestly reduces rewards for staking. So as you can imagine, there’s HUGE ETH withdrawal from Lido! This would be detrimental both to Lido’s reputation and to the downward pressure on the price of ETH which is also held by Lido.

** Rage Quit: Innovation or Self-Destruction?**

This entire arrangement sounds pretty familiar from the 2008 financial crisis. Everyone got so caught up in the pursuit of short-term profit that there was a total failure to identify the systemic risks that were accumulating behind the scenes. Just like that, in the hurry to decentralize everything under the sun, how are we ignoring the breeding ground of unintended consequences? Is granting stETH holders veto power really worth the danger of a “bank run” on Lido?

Rocket Pool Centralization Rocket Pool’s approach to decentralization is distinctive in a number of ways. Instead of giving veto power over each decision directly to stakers, it depends on a network of independent node operators. Frax Ether also uses a fractional-algorithmic stability mechanism, which has its own unique set of trade-offs. Maybe Lido should have learned more from these models before barreling full speed into this completely untested governance experiment.

Ultimately, it boils down to incentives. These risks and others aside, StETH holders are mostly doing this for the staking rewards. Though this is all perfectly understandable, it is not in the long-term health and stability of the Lido protocol. Our community of LDO token holders is passionate about this success of the protocol. As such, they are better positioned to make short-term detrimental decisions that will advantage Lido long-term.

** Incentives: Short-Term vs. Long-Term**

To extend the analogy, if we give stETH holders veto power, aren’t we just giving the passengers control of the ship? Shouldn’t the captain be responsible for this instead? It’s a bit like allowing the patrons of a restaurant to manage the back of the house. Where they do have some good ideas, they likely don’t have the experience to run the whole show.

Lido should be deeply alarmed by the prospect of stETH holders putting short-term profits ahead of sustainable long-term growth. What checks and balances could be established to ensure this doesn’t occur? What governance or technical mechanisms should be implemented to ensure that stETH holders have the proper incentives and information to make prudent liquidity decisions?

Before pushing ahead with an on-chain vote, Lido should clarify these fundamental issues. Otherwise, LIP-28 could end up being a costly mistake, one that not only undermines Lido's position in the Ethereum staking landscape but sends a chilling message to the entire DeFi community: decentralization without proper safeguards can be a recipe for disaster. This isn’t just a shift in power, it’s a shift in risk. Ultimately, we need to be clear about who will incur the cost if this fails.

Before rushing into an on-chain vote, Lido needs to address these crucial questions. Otherwise, LIP-28 could end up being a costly mistake, one that not only undermines Lido's position in the Ethereum staking landscape but also sends a chilling message to the entire DeFi community: decentralization without proper safeguards can be a recipe for disaster. It is more than just a power shift, it's a risk shift, and we need to understand who ultimately bears the burden if things go south.