After a successful third testnet merge, Sept. 19 was recently proposed as the tentative target date<\/a> for the Ethereum Merge. Ethereum is set to fully transition from proof-of-work (PoW), the original consensus mechanism used by the Bitcoin network, to the more energy-efficient proof-of-stake (PoS) used by younger networks like Solana and Cardano.<\/p>\n \u201cThe Merge won\u2019t solve Ethereum\u2019s scaling concerns on its own. It is just the beginning of a road map to achieve future scaling upgrades,\u201d Jacob Blish, head of business development at Lido, shared with Cointelegraph. <\/p>\n The staked Ether (ETH<\/a>) on the Beacon Chain, the PoS network that mirrors Ethereum\u2019s transactions, is expected to remain locked up for at least six months after the Merge is completed. After the Merge, staked ETH liquid tokens will start benefiting from transaction fees and maximal extractable value, meaning yields will go up. <\/p>\n There has been a lot of hype around the Merge. It is the single biggest event in crypto for a very long time, Rocket Pool founder Darren Langley told Cointelegraph, adding, \u201cThe lockup period is testing liquid staking protocols now but this is mainly due to macro conditions and the ongoing Centralized Finance (CeFi) drama. Once it blows over, liquid staking will explode.\u201d<\/p>\n Currently, ETH staking yields are earning<\/a> close to a 4% annual percentage rate (APR), with just over 10% of the ETH supply being staked, according to StakingRewards.<\/p>\n The launch of the Beacon Chain created a need in the ecosystem for a decentralized liquid staking solution that would compete against centralized exchanges (CEX) and could be used within decentralized finance (DeFi) for lending, borrowing and more.<\/p>\n The staking service offered by Lido has gained popularity as the first protocol to implement a liquid staking derivative on Ethereum through the minting of the stETH token. Contrary to popular belief, stETH is not meant to be pegged to ETH. As Blish shared:<\/p>\n \u201cStaked ETH issued by Lido is backed 1 to 1 ETH, but the exchange rate isn\u2019t pegged. It can fluctuate and trade at a premium or a discount as the secondary market forces dictate the price. This doesn\u2019t affect the underlying backing of stETH.\u201d<\/p><\/blockquote>\n Lido\u2019s first mover advantage to launch a liquid staking product has helped the protocol move ahead with more DeFi integrations for stETH as well as other multichain-staked products for Solana, Polygon, Polkadot and Kusama. The team recently announced that stETH will expand to layer-2 solutions<\/a> to further their DeFi integrations.<\/p>\n The protocol attracted liquidity to the Curve pool with incentives in the form of additional rewards of Lido\u2019s LDO token and a referral program to further its growth strategy and consolidate itself as a temporary winner within the liquid staking space.\u00a0<\/p>\n When compared to other protocols in the DeFi ecosystem as a whole, Lido stands out as the only product that has been able to compete and even surpass its centralized counterparts, like the Binance ETH (BETH) token, in terms of total value locked.<\/p>\n New products tend to start out having strong market leaders, but soon competition develops and innovation ensures fresh entries that have the potential to take up market share. The network effect achieved by Lido in a short period has made it challenging for its competitors to catch up and seize a substantial share of the market.\u00a0<\/p>\n Recent:\u00a0Borrowing to buy Bitcoin: Is it ever worth the risk?<\/a><\/em><\/strong><\/p>\n Other liquid staking projects have small differences in fees, product decentralization and the token characteristics they offer, but the value proposition remains the same: to empower users to maximize their capital efficiency and compound their yield while securing the network.<\/p>\n \u201cThe Ethereum ecosystem is built on trustless decentralization. That much voting power in the hands of one organization is certainly counter to that ethos,\u201d Jordan Tonani, head of institutions at Index Cooperative, told Cointelegraph, adding, \u201cHaving a healthy competition between multiple liquid staking protocols is a better outcome, and shortly after the Merge, a new crop of liquid staking protocols will be propped up to promote decentralization.\u201d <\/p>\n Rocket Pool represents over 1.5% of all Ether staked, with 1,300 individual node operators across 84 geographic locations. Because of this, it could impact Lido\u2019s market dominance and grow its relevance in the liquid staking space with new scaling solutions. <\/p>\n Stakehound, Stkr and Stakewise are some of the other projects trying to make a dent in Lido\u2019s market share but still lag behind in terms of liquidity depth and utility as collateral in DeFi.<\/p>\n It is worth highlighting that Rocket Pool\u2019s permissionless approach seems to appear more decentralized at first sight, contrary to Lido\u2019s permissioned one, which was a trade-off in order to ensure the reliability of node operators at the early stages of the protocol. The Lido team has been working on permissionless onboarding based on performance reputation to shift from their current model.\u00a0<\/p>\n Considering the data, Lido currently has a monopoly on the immature liquid staking derivative market.<\/p>\n Lido, as a decentralized autonomous organization (DAO), opened<\/a> the debate on its governance forum around stETH being limited to a fixed percentage of the whole ETH staked. Blish explained:<\/p>\n \u201cWe are aligned with Ethereum\u2019s decentralization ethos at the core. Governing the protocol through a DAO ensures Lido will not pursue any actions that can enter into conflict with our community and values.\u201d<\/p><\/blockquote>\n Also, a dual token governance proposal was recently passed that allows holders of stETH to veto governance proposals by LDO tokenholders that can harm stakers on the Ethereum network.\u00a0<\/p>\n Similar to the liquid staking dilemma proposed above, Bitcoin (BTC<\/a>) mining appears to show centralizing forces. The space has matured into a market where the three biggest mining pools have over 50% of the network\u2019s hash rate. And, the top six mining pools account for<\/a> more than 80% in the last three months, according to data from BTC.com. <\/p>\nLido\u2019s liquid staking service<\/h2>\n
![](\"https:\/\/s3.cointelegraph.com\/uploads\/2022-08\/ab6e66a7-cc8e-4ef2-9bdb-70a465099040.jpeg\")
Alternatives to liquid staking derivatives<\/h2>\n
Monopoly or oligopoly, it has to be decentralized<\/h2>\n