Lido's Dual Governance A Measured Step or a Dangerous Precedent?

Lido’s recent introduction of their Dual Governance model, which gives stETH holders governance timelocks and “rage quit” capabilities, sounds like a gamechanger. Revolutions often have unintended consequences. Have we only seen the first stages of a fine-tuned progression of DAO governance, or are we just setting the stage for discord down the road? Let's dive into the potential pitfalls.

Is True Decentralization an Illusion?

The allure of decentralization is strong. Providing greater governance capabilities to stETH holders feels democratic at its core. How decentralized is it if a handful of whales control over 90% of stETH? Their powers to veto decisions made by the much broader DAO are huge and their existence raises some very important questions. Consider this: the timelock triggers at 1% of Lido's Ethereum TVL. The rage quit, the more severe alternative, comes into play at 10%.

Now, picture a tiny minority of shareholders in a publicly traded company just as suddenly acquiring the ability to stop big corporate actions in their tracks. The market would be plunged into extreme turmoil.

This is not to say that stETH holders should be tuned out of the discussion. We need to ask if this state mechanism really moves us towards decentralization. Or does it just replace that power with another entity that is equally or more opaque? Are we simply exchanging controlling power with the DAO for controlling power by large stETH holders in an oligarchic manner?

Imagine a scenario: Lido faces a critical security vulnerability requiring a swift upgrade. The DAO votes to implement a fix. A subset of stETH holders activates the timelock. They can be because they are focused on short-term profit, or because they fundamentally disagree with the proposed solution.

Will It Paralyze the DAO's Decision-Making?

To be sure, the de-escalation safeguards (stakers withdrawing stETH, DAO cancelling proposals) provide some recourse, but the possibility of future gridlock is real. The rage quit mechanism was definitely not intended as a failsafe. It can be easily weaponized by competing factions of dissenters, leading to perpetual internal warfare and debilitating Lido’s capacity to pivot to the rapidly-evolving DeFi ecosystem. It’s a close cousin of the legislative filibuster – intended to protect minority rights, but perverted into a tool of pure obstructionism. Is this really the future we envision for DAOs?

This is a debate between operational efficiency and total control. At times, especially in moments of crisis, that sort of decisive action is critical, and distributed consensus can be a death blow.

Lido’s Dual Governance isn’t occurring in a vacuum. It sets a precedent. If successful, other DAOs will surely follow suit and create similar mechanisms. What if it fails? What if it actually causes instability, infighting and in the end, the slow death of Lido itself.

Of particular concern is the precedent of the “rage quit.” It pretty much just makes it possible for stakers to exit whenever they don’t like a decision, essentially. In a DAO, majority rule is the exception. Healthy debate and healthy compromise are both necessary ingredients to produce anything worthwhile. Are we creating a pernicious easy out for stakers? If they are, are we pushing them to tune out of governance entirely and sort of “rage quit” any time they don’t get their way?

It’s the equivalent of allowing every citizen to secede from the country anytime they don’t like a law. Chaos ensues, doesn't it?

We must be honest about the adverse long-term consequences of this model. Or are we creating a fragile and myopic DeFi bubble? Or are we planning a system that’s easily exploitable and soon to fail? As the Lido DAO community continues to undergo this important review, it is imperative. Negotiators can’t just get lost in the technical weeds. It all has to confront deeper questions about the philosophy of governance.

Precedent Set: Stability or Anarchy?

The current Ethereum TVL thresholds should be serve as a good baseline to start from. We need to keep broadly judging and revising them to adapt as the times change. We need an honest and unsparing conversation. It’s important to explore the unintended consequences — both good and bad — of allowing stETH holders to have veto power at this scale. The stakes are high. The fate of the future DAO governance ecosystem might well rest in its hands.

The "rage quit" is a particularly concerning precedent. It essentially allows stakers to exit when they disagree with a decision. But in a DAO, disagreement is the norm. Healthy debate and compromise are essential for progress. By providing an easy escape route, are we incentivizing stakers to disengage from the governance process and simply "rage quit" whenever things don't go their way?

This isn't governance; it's market manipulation disguised as empowerment.

It's like giving every citizen the option to secede from the country whenever they disagree with a law. Chaos ensues, doesn't it?

We need to consider the long-term implications of this model. Are we building a more resilient and adaptable DeFi ecosystem, or are we creating a system ripe for exploitation and prone to collapse? The current review by the Lido DAO community is crucial, but it needs to go beyond technical details and grapple with these fundamental questions about governance philosophy.

The thresholds based on Ethereum TVL are a starting point, but they need to be continuously evaluated and adjusted as the landscape evolves. And most importantly, we need to have a frank and open discussion about the unintended consequences of empowering stETH holders with such significant veto power. The stakes are high. The future of DAO governance may depend on it.