LDO's Next Phase of Evolution: The Dual Governance Mechanism

The leading Ethereum liquid staking platform, Lido, has released the proposal for its Dual Governance mechanism, which is meant to be the next phase in the evolution of the protocol.

Lido, the leading Ethereum liquid staking platform, has released the proposal for its Dual Governance mechanism, which is meant to be the next phase in the evolution of the protocol.

Lido DAO contributors published an outline proposal on May 8, describing it as work that has been "years in the making."

According to the post announcing the proposal, Dual Governance is a dynamic mechanism that allows staked ETH (stETH) holders on Lido to be involved in the governance of the Lido ecosystem.

The Lido DAO is responsible for the governance of the Lido ecosystem, meaning only those who hold the native LDO tokens can vote on any changes to the protocol. This has disenfranchised ETH stakers who, despite being crucial to the protocol, do not have a say in the decisions that may also affect them.

Dual Governance will change that by allowing stETH holders to actively voice their dissent to any motion DAO governance on Lido that they are unsatisfied with. In such situations, the new mechanism allows them to use the threat of withdrawing their stETH tokens from Lido as a bargaining chip to get the Lido DAO to reconsider decisions.

The protocol describes the proposed governance model as a way to "de-escalate conflicts between the protocol stakeholders."

Works on the proposal have been ongoing since as far back as 2022, with Lido lead developer at the time, Sam Kozin, noting that the dual governance process is all about aligning incentives between all participants.

Lido Dual Governance mechanism explained

Meanwhile, the Dual Governance Proposal, known officially as Lido Improvement Proposal (LIP) 28, explains how it will work in detail.

According to the post, the model introduces a timelock contract between Lid DAO governance motions and execution with the timelock connected to an escrow.

When there is a motion that the stETH holders do not support, they can communicate their intention to exit the protocol by depositing their stETH, wstETH, and stETH withdrawal NFTs into a specific escrow contract.

If the funds deposited in the contract reach a first threshold, the duration of the timelock will start growing proportionally to the amount deposited.

Once the locked funds reach the second threshold, the rage quit mechanism is triggered, which blocks the execution of any motion under Dual Governance until the stakers withdraw their stETH into ETH.

For the first threshold, Lido DAO has proposed to be 1% of the Lido total value locked (TVL) on Ethereum, while the second threshold is currently set at 10% of Lido on Ethereum TVL.

The proposal also includes parameters such as minimum or maximum hours or days required before any step would be taken. For example, a proposal held in Dual Governance must be there for a minimum of 3 days before execution, while the minimum duration of the dynamic timelock is 5 days as long so far the shares of stETH locked are higher than the first threshold.

Ethereum stakeholders praise Lido’s proposal as LDO sees a rise in value

Many in the Ethereum community have praised the proposal, which they believe represents a great step for both Lido and Ethereum by mitigating governance risks for the protocol on Ethereum.

Lido is the second biggest DeFi protocol on Ethereum, with $21.48 billion in TVL, mostly on Ethereum.

According to Flashbots strategy lead Hasu, this proposal is the most important Lido upgrade ever.

Ethereum developer Tim Beiko also congratulated the Lido Team on the proposal, even though the date for implementation remains unknown.

With Lido set for an upgrade, its native token, LDO, has also seen massively positive performance in the last seven days with over 19% gains. It is up 8.66% in the last 24 hours and trades at $1.02. However, it remains down 43.31% year-to-date.