Here’s Major Flaw in Ethereum’s Decentralization After Merge
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The largest Ethereum holder on the market is not as decentralized as you might think
- Lido’s “decentralized model”
- Lido’s staked ETH causes chaos in the market
The Ethereum Merge was the biggest and most fundamental update to Ethereum in the history of the network. However, the network’s decentralization may have taken a hit given the dubious distribution of holders and the dubious nature of the market’s largest Ethereum investor.
Lido’s “decentralized model”
It’s no secret that Lido Finance is one of the largest holders of the “new” Ethereum, which operates on a purely PoS model. But Lido itself has a certain financial model where the stake rewards received by the pool are not sent to the delegators as such.
Instead, Lido keeps all rewards and sends stETH to delegators instead, making Lido technically a centralized ETH holder who can use it later without users’ consent. When unstaked Ethereum is burned and the rewards go to one party, the decentralization of Ethereum is called into question.
Paid stETH tokens also do not burn, which is another factor in favor of centralization. Unfortunately, users cannot control their own ETH until the staked cancellation of contracts is allowed.
Lido’s staked ETH causes chaos in the market
In June, the market was on the brink of disaster when the staked ETH token began to lose parity with spot Ethereum due to liquidity issues and the TerraUSD disaster. Despite the deepest liquidity pools in the market, the relatively moderate volume of sales was enough to overturn the value of the token issued by Lido.
Potentially, the collapse of stETH could cause more turmoil in the market than the TerraUSD situation, given the amount of tokens currently held by investors.