Understanding LidoDAO Governance: Structure, Challenges, and Future Developments

Day 18 of 30 Day Writing Challenge

TL;DR

LidoDAO uses a multi-track governance system with on-chain voting as its gold standard for decision-making. It operates through contracted service providers and offers validator participation through CSM (Community Staking Module) and the upcoming SSVLM. Despite facing challenges like low participation rates and complex proposal analysis, the DAO implements security measures and committee structures to distribute governance workload. For home stakers, CSM offers an entry path to the Lido ecosystem with optimistic vetting, while tools like Aragon, Snapshot, and Tally facilitate governance engagement.

This workshop is the 3rd session in a series by Solo Stakers Guild.

LidoDAO has established itself as a significant player in the Ethereum staking ecosystem, offering liquid staking solutions through a decentralized autonomous organization. This article examines LidoDAO's governance framework, operational model, and upcoming developments. While this article highlights how decisions are made within LidoDAO, lessons can be learned and taken away for how other DAOs governance process works. Special insights for home stakers looking to participate in the ecosystem are included.

I. Governance Framework and Operations

Core Governance Structure

LidoDAO employs a multi-track governance system designed to handle different types of decisions with appropriate levels of scrutiny and speed:

• Emergency Track: For urgent security-related decisions requiring immediate action

• Regular Process: For standard governance proposals

• Easy Track: Streamlined process for day-to-day operations, community funding, and smaller initiatives

• GateSeal: For specific gated decisions

The governance system relies on 22 approved delegates who actively participate in decision-making processes.

To submit snapshot votes, participants must hold at least 1,000 LDO tokens, establishing a minimum threshold for governance participation.

On-Chain Voting: The Gold Standard

LidoDAO, like many other DAOs, uses onchain voting as its ultimate decision-making mechanism. According to Samuel Chong (@stakesaurus), onchain voting represents the "gold standard of decentralised governance" for several key reasons:

Unlike traditional voting systems that rely on trusted third parties throughout the process, onchain voting:

• Records votes transparently and immutably on the blockchain

• Prevents tampering through cryptographic verification

• Tallies votes and executes decisions automatically via smart contracts

• Allows anyone to trigger proposal execution by paying gas fees

This system minimises the trust assumptions present in traditional voting where votes can be manipulated, tallies might be inaccurate, and elected officials may not follow through on promised actions.

For home stakers interested in LidoDAO, onchain governance directly affects critical protocol parameters such as:

• Smart contract updates

• Fund transfers

• Token operations

• Access permissions

• Protocol fees

• DAO structure changes and

• Node Operator management

Service Provider Model

Rather than hiring team members directly, LidoDAO operates through various contracted service providers and contributor groups, including freelancers. This organizational structure is complex and continually evolving.

This model allows the DAO to maintain operational flexibility while accessing specialized expertise from established teams across different domains, including technical development, liquidity management, and ecosystem support.

For those interested in understanding LidoDAO's organizational structure in more depth, these forum posts provide valuable context:

• Introducing the Lido Contributors Group - Details the creation of legal entities to support contributor operations

• Lido Ecosystem BORG Foundation - Explains the establishment of specialized foundations for ecosystem growth

• Lido Labs BORG Foundation - Outlines the technical development foundation's structure

II. Validator Participation and Community Staking

Validator Approaches and the SSVLM Proposal

Validator participation represents a crucial aspect of LidoDAO's operations. Currently, the Simple DVT (Distributed Validator Technology) operator is not accepting new applications, but alternative validator participation options exist:

• CSM (Community Staking Module): Allows for community stakers to utilize the Lido protocol to run validators in a permissionless manner.

• SSVLM (SSV Lido Module): permissionless staking module leveraging the open source nature of SSV Network’s Distributed Validator Technology (DVT) to integrate Node Operators (NOs) into the operator set of Lido on Ethereum.

The SSVLM proposal represents a significant evolution in Lido's validator ecosystem. This permissionless staking module leverages SSV Network's Distributed Validator Technology, enabling node operators to join Lido's validator set through a more decentralized approach.

Key features of SSVLM include distributed key generation for enhanced security, node operators grouped into operational clusters, and management by Module Oracles (initially 5 participants). The implementation roadmap outlines testnet deployment in Q2 2025, with mainnet deployment planned for the second half of 2025.

CSM: Entry Point for Home Stakers

The Community Staking Module (CSM) launched in October 2024 has become a critical component for expanding Lido's validator set. Since its launch, approximately 300+ independent Node Operators have joined Lido through the CSM, significantly improving the distribution of Node Operators within the protocol.

Joining as a Node Operator - The Basics

What you need to provide:

• Your validator key (think of this as your digital ID that proves you're a legitimate validator)

• A digital signature that matches your key (like your personal signature on a document)

• A security deposit called a "bond" (similar to a security deposit when renting an apartment)

This security deposit protects everyone if something goes wrong with your validator. If your validator misbehaves or makes mistakes, part of your deposit might be used to cover any losses. It's like putting some "skin in the game" to make sure you do a good job.

The "Trust First, Verify Later" Approach

When you upload your validator information, the system assumes you're honest right from the start. Your data is treated as valid and you can begin participating immediately.

There's still a checking system called the Data Signing Module (DSM) that verifies everything is correct. It's like being allowed into a concert immediately, but security might still check your ticket as you walk around.

This approach makes it much easier for home stakers to join without waiting through lengthy approval processes. You don't need special connections or to jump through complicated hoops - if your information is correct, you're good to go.

By simplifying the process while keeping important safety checks, Lido has made it possible for everyday Ethereum enthusiasts with some technical knowledge to participate in validating transactions, not just big companies with lots of resources.

Governance Participation Challenges

Despite its sophisticated structure, LidoDAO faces several governance challenges:

• Low participation rates: Under 10% of token holders actively participate

• Analysis complexity: Proposal analysis requires significant time and expertise

• Time pressure: The 3-day onchain voting period creates constraints for thorough deliberation

The Technical Barriers of Onchain Voting

While onchain voting provides maximum security and transparency, it comes with inherent challenges that affect participation:

• Complexity and costs: Voters need technical expertise to verify smart contract code changes and must pay gas fees for onchain transactions, which discourages smaller token holders from participating

• Voter enthusiasm: As with many governance systems, maintaining consistent participation is difficult, especially for routine decisions

• Balance of power concerns: Token-based voting ties governance power to financial investment, potentially allowing wealthy entities to exert more influence

To address these challenges, LidoDAO has implemented the "Easy Track" system for routine operations. This optimistic governance workflow assumes proposals will pass unless a minimum objection threshold is met, reducing the burden on voters while maintaining security for low-risk decisions.

IV. Delegate Process and Best Practices

Effective Delegate Strategies

Two delegates that were there at session 3 Solo Stakers Guild Singapore, Sam and Katherine, shared their approach toward proposal reading and analysis.

Sam (Stakesaurus) is a Lido Community Lifeguard and founder of Stakesaurus who has been actively supporting home stakers across Southeast Asia He has organized workshops and guides for solo stakers, helping them navigate the technical aspects of running validators and participating in protocols like Lido's Community Staking Module (CSM). As part of the Lido Community Lifeguards Initiative, Sam works to promote home staking and bridge the gap between technical knowledge and practical implementation.

Katherine Ng is the founder and managing partner of Katashe Solutions, a Web3 venture builder based in Singapore With a background that includes leadership roles at TZ APAC and various commercial positions, Katherine brings extensive expertise in bridging mainstream technologies with decentralized innovations. She contributes her strategic insights to governance discussions, emphasizing the importance of strong foundational knowledge in effective decision-making.

Sam's Network State Approach Sam adapted Balaji Srinivasan's Network State framework to break down proposals into digestible formats:

• One-liner: Core concept

• One-pager: Key details

• Ten-pager: Comprehensive analysis

This structured approach helps delegates efficiently process complex information while ensuring all critical details are preserved for thorough decision-making.

Sam's Engagement Strategies

• Ask simple, clarifying questions to proposal authors

• Analyze impacts across different stakeholder groups

• Recognize that budget proposals are typically easier to evaluate than technical ones

• Utilize resources like Oxor.io for technical understanding - Example report

• Leverage DeepDAO for governance analytics and benchmarking

Katherine's Foundational Knowledge Framework - she emphasized that effective delegate participation requires acquiring substantial background knowledge:

• Understanding stakeholder dynamics and mapping (who's affected by decisions)

• Knowing how the various committees function

• Understanding treasury strategy and fund deployment

• Grasping how sustainable protocol fees work

• Having knowledge about DAO growth strategies

Katherine's approach highlights the importance of contextual understanding before attempting to analyze complex proposals, reinforcing that effective delegation requires significant onboarding and continuous learning.

Inside a Delegate's Proposal Analysis Process

For those interested in understanding how LidoDAO governance works from the inside, below is a systematic approach shared by an active LidoDAO delegate:

Initial Assessment (1-2 hours)

• Read the complete proposal text carefully, highlighting key sections

• Identify the core change being proposed (technical, economic, operational)

• Map out which stakeholders would be affected (protocol, users, node operators)

• Note any immediate questions or concerns that arise

Deep Technical Review (2-4 hours)

• For technical proposals like SSVLM, examine architecture diagrams

• Review any code references or technical specifications

• Consider security implications and potential attack vectors

• Evaluate how it interacts with existing Lido infrastructure

Economic Analysis (1-2 hours)

• Assess financial implications for the protocol and stakeholders

• Evaluate reward structures and fee mechanisms

• Consider game theory aspects and potential economic exploits

• Project long-term sustainability of the economic model

Community Sentiment Gathering (ongoing)

• Review discussion threads on the forum

• Engage with proposal authors for clarification

• Consult with technical advisors when needed

• Speak with fellow delegates to understand diverse perspectives

Risk Assessment (1-2 hours)

• Identify potential failure modes

• Consider centralization risks

• Evaluate operational complexities

• Assess migration risks if replacing existing systems

Decision Framework

• Alignment with Lido's long-term vision and values

• Enhancement of security and decentralization

• Proper alignment of economic incentives

• Sufficient consideration of alternative approaches

• Realistic implementation timeline

Vote Documentation

• Document reasoning in a structured format

• Prepare a public explanation of voting decisions

• Include any reservations or suggestions for improvement

In my opinion, this is the time investment (7-11+ hours per proposal) that good delegates make to ensure informed governance decisions. For home stakers interested in becoming delegates, understanding this workflow provides valuable insight into the responsibilities involved.

Security Considerations: Flash Loans and Smart Contract Architecture

LidoDAO's governance incorporates security measures to protect against potential attacks:

• EIP-712: one application is for enabling secure offchain voting with onchain verification Note: that the standard itself is more general-purpose and can be used for many types of signed structured data beyond just voting systems.

• Multi-stage process: The progression from discussion to snapshot to onchain vote provides protection

• Staking requirements and timelocks: Mitigate concerns related to flash loan attacks

The Smart Contract Architecture Behind Onchain Governance

What makes onchain governance technically possible is the separation of state from execution logic in smart contracts. As Sam explains, this separation is similar to how user data is retained when updating apps on an app store, with one critical difference: in Web3, users maintain ownership of their data.

This architecture enables the automated execution of governance decisions while maintaining the security of user funds. When LidoDAO votes to change protocol parameters or upgrade contracts, the implementation can change while user balances remain secure in storage contracts.

For home stakers, this provides assurance that their deposited ETH remains safe even during protocol upgrades. This is a significant advantage over centralized staking services where users have no visibility into or control over technical changes.

Committees and Offchain Governance

To distribute the cognitive load of governance participation, LidoDAO is exploring specialized committees established through offchain voting:

• Technical Committee: Evaluates protocol changes and upgrades

• Treasury Committee: Oversees financial decisions

• Governance Committee: Refines governance processes

• Risk Committee: Assesses potential vulnerabilities

Pectra Upgrade Implications

The upcoming Ethereum Pectra upgrade (May 7) will have several potential impacts on Lido:

• May affect validator performance metrics and requirements

• Could influence validator rewards mechanisms

• May necessitate smart contract adjustments

As LidoDAO continues to evolve, its governance structure represents an interesting case study in balancing decentralization, security, and operational efficiency in the management of a complex DeFi protocol.

Tools for Home Stakers to Participate in Governance

For home stakers interested in participating in LidoDAO governance, several tools facilitate engagement:

• Aragon: The base layer for LidoDAO's governance implementation

• Snapshot: For offchain signaling votes before moving proposals on-chain

• Tally: A user-friendly interface for interacting with onchain governance

• LidoDAO Research Forum: Where proposals are discussed before formal voting

Moving from traditional voting to on-chain voting marks a big step forward in governance. Most protocols begin with centralized control. LidoDAO shows how protocols can mature by adopting fully on-chain voting. This approach increases transparency and reduces the need for trust.

Solo stakers gain two major benefits by participating. First, they get a direct voice in protocol decisions. Second, they develop practical skills in decentralized organizing. These skills will become increasingly valuable as blockchain technology grows and evolves.

This article is for the 3rd part series of the Solo Stakers Guild. It explores how protocols like Lido implement decentralized governance. Opportunities for home stakers to participate in the LidoDAO was also highlighted.