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Decentralized solutions like Lido and Rocket Pool, which enable "liquid" staking are gaining traction with ~5M ETH under TVL. In the case of Lido, users stake ETH and, in return, get stakers tokens (stETH), essentially a derivative product of ETH that trades near 1-to-1 with ETH. This gives stakers more flexibility and liquidity since they can sell their stETH tokens on the open market or use the stETH tokens in other DeFi protocols. With an impressive $14.6 billion worth of Ethereum (ETH) staked, Lido's TVL is more than double that of its closest competitor, MakerDAO, the issuer of the top three dollar stablecoin, DAI.

Lido's platform is responsible for staking 32% of all ETH, with the decentralized autonomous organization (DAO) controlling 230,000+ validators. As U.S. regulators increasingly categorize yield services as securities, the CEX share of staking is expected to decline. While Kraken has acquiesced to regulatory pressure and permanently withdrawn staking, Coinbase is resisting and may potentially challenge Lido by capturing the institutional staking market in the long term.

Lido's rise to prominence marks the third significant instance of a DeFi product challenging centralized incumbents, following Uniswap and dYdX's contest for top trading volume rankings. It also represents the first time DeFi has clearly dominated. Lido leads the DeFi fee charts with a $581 million per year run rate, a remarkable feat considering the Ethereum Merge occurred less than a year ago. This development prompts the question: what other substantial industries will be built on top of yet-to-be-invented DeFi primitives?

Ethereum staking continues to grow, with 20% of all existing ETH now staked. Although increased staking participation dilutes the yield on each staked ETH due to a fixed reward stream shared among a larger staking pool, Ethereum holders can still profit. Ethereum has the potential to be deflationary when the fees burned exceed new issuance from validator rewards. Since Ethereum's transition to Proof of Stake during the Merge last September, it has been deflationary at a rate of 0.3% per year. This trend underscores the evolving dynamics of Ethereum staking and the potential for DeFi to reshape the financial landscape.

Despite the positives, Lido's current setup doesn't eliminate all risks, particularly concerning the influence of LDO holders over the validator set. This power concentration could potentially jeopardize the health, decentralization, and credible neutrality of Ethereum as a whole.

The Lido community has recognized these issues and is taking measures to mitigate them, such as introducing stETH governance and working towards implementing a staking router in Lido v2. At its core, Lido V2 lays the groundwork for the protocol to transition from a single, authorized validator group to incorporating various unique validator subgroups, referred to as modules. The primary infrastructure facilitating this transformation is the staking router, responsible for determining the distribution of new user deposits to various modules. Initially, the Lido DAO will determine the target proportion of active Lido validators that each module can accommodate. Although no specific timeline has been disclosed for Lido V2's activation on the Ethereum mainnet, it's anticipated to be rolled out in stages. Prioritization is expected to be given to withdrawal functionality over the full launch of the staking router.

Nonetheless, it is crucial that the community continues to strive for stake diversification by easing solo staking and creating, as well as growing, permissionless, governance-minimized liquid staking solutions.