Ethereum’s transition to Proof-of-Stake (PoS) began on December 1, 2020, with the launch of the Beacon Chain. For the first time, users could stake ETH and participate directly in network security. However, this new era introduced several barriers that limited broad participation:
- No withdrawal capability: Once ETH was staked, validators couldn’t withdraw their deposits until the Beacon Chain enabled transfers — a feature delayed for over two years.
- Lack of liquidity: Staked ETH was effectively locked, preventing users from trading, transferring, or using it as collateral in DeFi protocols.
- High capital threshold: The 32 ETH minimum per validator excluded smaller holders.
- Operational complexity: Running a validator required technical know-how and reliable uptime, deterring many users.
It quickly became clear that users needed a better solution — one that reduced friction while preserving decentralization.
The Rise of Centralized Exchanges in Staking
Centralized exchanges like Binance, Kraken, and Coinbase were among the first to respond. They aggregated user funds (solving the 32 ETH barrier), managed validator operations (reducing technical load), and issued liquid staking derivatives (addressing illiquidity).
Because liquidity and user acquisition are core to their business models, these platforms could even offer staking services at no cost — or with added incentives.
Today, exchange-operated validators dominate the Ethereum staking landscape. While convenient, this trend raises serious concerns: if a few centralized entities control the majority of block production, Ethereum’s decentralization is at risk.
👉 Discover how decentralized staking protects blockchain integrity.
This is where Lido enters the picture — not just as an alternative, but as a mission-driven effort to build a trustless, decentralized staking infrastructure.
Why Trustless Staking Matters
1. Security Through Decentralization
Ethereum does not support native delegation, creating space for third-party staking providers. Given staking’s direct impact on network security, trustless solutions are preferable to custodial ones.
2. Staking Enables Centralization
PoS introduces powerful network effects. Liquid staking derivatives like stETH can dominate liquidity pools and lending markets, creating winner-takes-all dynamics. Without safeguards, this could lead to dangerous centralization.
Lido’s goal is to harness these network effects while minimizing trust assumptions — ensuring Ethereum remains resilient and decentralized.
The Path to Full Trustlessness
When Lido launched, building a completely trustless system wasn’t feasible. We faced a choice: delay launch until perfect decentralization was possible, or deploy an improved interim solution while committing to continuous improvement.
We chose the latter — an iterative path that allowed Lido to compete with centralized providers while progressively removing trust dependencies.
Key Trust Assumptions in Early Lido
Three main issues prevented full trustlessness:
- Custodial deposits before July 15, 2021: Early validators used BLS-based withdrawal credentials (0x00), controlled by a 6-of-11 multisig of trusted Ethereum contributors.
- Permissioned withdrawals: stETH holders couldn’t force unstaking; they had to rely on node operators to act honestly.
- Permissioned node operators: Only LDO governance could add new node operators, requiring trust in token holders’ judgment.
Note: Until withdrawals were enabled on the Beacon Chain, no one — including the multisig — could access staked ETH. So while these were theoretical risks, they didn’t result in actual user losses.
Eliminating Trust: Technical Progress
Moving Withdrawals On-Chain
The Beacon Chain later introduced 0x01 withdrawal credentials, allowing Ethereum addresses (including smart contracts) to own validators.
We upgraded Lido so that all new deposits after July 15, 2021, use contract-controlled withdrawal credentials. This means new stETH is fully non-custodial.
👉 Learn how smart contract control enhances asset security.
Existing deposits remain on 0x00 credentials because changing them requires either:
- Withdrawing and re-staking (impossible pre-Merge), or
- Using a future credential rotation mechanism (currently under development).
Once withdrawals are fully functional, this upgrade will be critical for full decentralization.
Enabling Remote Forced Unstaking
Currently, only node operators can initiate voluntary exits. This creates a potential attack vector: a malicious operator could delay or block unstaking requests.
The proposed 0x03 withdrawal credential would allow stETH holders to remotely trigger validator exits via an on-chain exit contract. This would eliminate reliance on operator goodwill and make unstaking truly permissionless.
This feature is not yet live but is actively discussed within the Ethereum research community.
Opening Node Operator Registration
The most complex challenge is who can become a node operator.
Lido issues fungible stETH tokens, meaning all users share the same asset regardless of which validator their ETH backs. This simplifies liquidity but introduces risk: poor performance by one validator affects all stETH holders.
Therefore, Lido must ensure only high-quality operators are selected — without centralizing control.
Several approaches are being explored:
Centralized Registry + Off-Chain Reputation
Currently, LDO governance approves node operators based on reputation and track record. While secure, this gives governance excessive power if stETH becomes dominant.
Staker-Curated Registries
Let stakers vote on operators. Aligns incentives but risks short-termism due to liquid token markets.
Bonding Mechanisms
Require node operators to post collateral (like Rocket Pool). Increases security but reduces capital efficiency — a disadvantage against custodial providers who can leverage user funds freely.
Secret Shared Validators (SSV)
A proposal by the Ethereum Foundation to split validator keys among multiple parties using threshold signatures. Increases fault tolerance and reduces single points of failure.
Lido is actively researching SSV integration through community forums and developer collaborations.
Performance Tracking
Use on-chain data (uptime, inclusion rates) to rank operators. High-performing validators get more stake; underperformers are phased out during withdrawals.
Insurance Markets
Create prediction markets where users bet on validator performance. Winners are rewarded; Lido uses outcomes to assess operator reliability.
Node Operator Score System
A hybrid model where operators earn “trust points” through:
- Participation in SSV clusters
- Posting bonds
- Buying insurance
- Consistent performance over time
New operators start with low scores and limited capacity. As they prove reliability, they gain access to more stake — creating a merit-based, decentralized selection process.
This system ensures anyone can participate while incentivizing excellence and minimizing systemic risk.
Frequently Asked Questions
Q: Is stETH safe if withdrawals aren’t fully enabled?
A: Yes. No one can withdraw staked ETH until Beacon Chain rules allow it. Funds are secure, and no trust assumptions affect asset safety at this stage.
Q: How does Lido differ from exchange staking?
A: Exchanges centralize control. Lido aims for full decentralization — using smart contracts, community governance, and open participation to reduce reliance on any single entity.
Q: Can I lose money with stETH?
A: Yes — primarily through validator slashing or poor performance. However, risk is diversified across many validators, and mechanisms like insurance and scoring aim to minimize exposure.
Q: What happens when withdrawals are enabled?
A: Users will be able to redeem stETH for ETH. Contract-controlled withdrawals and forced exit mechanisms will ensure this process remains decentralized and secure.
Q: Will Lido ever be fully trustless?
A: That’s the goal. While some trust elements remain today, clear technical paths exist to eliminate them — especially with upcoming Ethereum upgrades.
Q: How can I become a Lido node operator?
A: Currently, only approved operators can join via LDO governance. Future systems may allow open entry with reputation-based scoring or bonding requirements.
👉 Start your journey into decentralized finance with secure staking options.
Conclusion
We believe the winning Ethereum staking solution will be maximally decentralized, non-custodial, and resistant to capture — exactly the vision behind Lido.
Waiting for perfect conditions would have ceded the market to centralized players. Instead, Lido chose to launch with strong safeguards and commit to relentless iteration.
Today, we’re closer than ever:
- New deposits are contract-controlled
- Remote unstaking proposals are advancing
- Decentralized node selection models are under active research
As Ethereum evolves, so will Lido — reducing trust assumptions step by step, building a truly permissionless future for liquid staking.
Core Keywords: Ethereum staking, liquid staking, trustless staking, stETH, Beacon Chain, decentralized finance (DeFi), node operator, proof-of-stake (PoS)