Lido (stETH) holders get more influence in protocol decisions

The May 8 proposal, dubbed LIP-28, introduces a Dual Governance framework.

Lido's governance community is reviewing a new proposal that aims to give staked Ethereum (stETH) holders more input in protocol decisions.

The proposal, known as Lido Improvement Proposal 28 (LIP-28), was introduced on May 8. It proposes a "Dual Governance" framework that would complement the existing LDO token holder governance model.

Currently, only LDO token holders can vote on changes to the Lido protocol, granting them complete control over decisions that impact everyone in the ecosystem, including those who stake ETH and receive stETH in return.

While stETH holders are crucial to the platform's success, they lack any formal avenues to oppose or influence DAO proposals, potentially leading to scenarios where a majority vote by LDO token holders could negatively impact a large portion of the community.

The DeFi protocol's proposal aims to grant stETH holders a more active role in protocol decisions, especially in cases where proposals passed by LDO token holders may be considered contentious.

Describing the proposal as the "most important Lido upgrade ever," Flashbots strategy lead Hasu noted the potential for the proposal to become a "hot topic" among Lido governance participants.

Lido is Ethereum's largest liquid staking platform, controlling around 27% of the total ETH staking market. The protocol enables users to stake ETH with validators and receive stETH in exchange, which can be used in DeFi apps, offering users flexibility and liquidity.

How Lido’s Dual Governance model works

The proposed system introduces a timelock mechanism between DAO proposals and their execution. This timelock period provides an opportunity for stETH holders to respond if a decision could negatively impact them.

To do so, they would need to lock their stETH, wstETH, or withdrawal NFTs into a special escrow contract. Once deposits in the escrow reach 1% of Lido's Ethereum total value locked (TVL), a delay period begins.

If deposits grow to 10% of TVL, the proposal enters a "rage quit" state, where no action can be taken on the proposal until the locked tokens are converted back to ETH.

This model effectively gives stETH holders a meaningful voice in governance without forcing them to abandon the protocol if they disagree with a proposal. It also allows the DAO to pause and reconsider contentious proposals.