Lido Finance, the top liquid staking protocol for Ethereum, has revealed plans to introduce a dual governance structure designed to bring more decentralization and accountability to its protocol. The plan will seek to officially empower staked Ether (stETH) owners to have a voice in making governance decisions while tackling the risk of power centralization in LDO token owners.
Empowering stETH Holders Through Veto Rights
The suggested Lido Improvement Proposal (LIP-28) provides a mechanism by which stETH holders will have veto power over LDO token holders’ decisions. Governance decisions are presently decided by LDO holders only, with no direct influence on decisions for stakeholders holding stETH, even though they play an important role in the ecosystem.
In the new system, when stETH holders as a group lock up at least 1% of Lido’s TVL in a special escrow contract, a timelock is created that slows down the approval of the disputed proposal. If the locked value touches 10% of the TVL, a “rage quit” system is engaged, which stops the proposal from being executed at all until the locked funds are withdrawn. This framework enables stETH holders to express strong disagreement with certain proposals, giving a check against potential governance abuse.
Increasing Decentralization and Protocol Resilience
The dual governance framework seeks to reconcile the interests of both LDO and stETH holders, creating a more decentralized decision-making process. By integrating stETH holders into the governance system, Lido hopes to reduce the risks of unilateral decision-making and increase the protocol’s resilience against controversial proposals.
This move also comports with larger trends in decentralized finance (DeFi), where protocols are looking more and more to governance models that allocate authority more evenly across stakeholders. By empowering holders of stETH, Lido not only solves internal governance issues but also establishes a precedent for other DeFi platforms to embrace more democratic governance structures.
The proposal is currently under discussion within the Lido community, with a formal vote anticipated in the near future. If implemented, this dual governance model could serve as a blueprint for other protocols seeking to enhance stakeholder engagement and decentralization.
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