Lido DAO Approves Dual Governance Model, Giving stETH Holders Veto Power

Lido DAO has formally approved a proposal to introduce a dual governance model, a significant update aimed at enhancing the control of stETH holders over crucial protocol decisions. This decision was confirmed on June 30 following a successful vote by LDO token holders. The new system is scheduled to go live on-chain on July 4. The dual governance model features a dynamic timelock mechanism that allows stETH holders to block or delay proposals approved by LDO holders if they disagree with the decisions. The more stETH that is locked in opposition, the longer the delay. For instance, if at least 1% of the entire supply of stETH is locked in protest, an additional timelock of 5 to 45 days is added to any proposal. When 10% opposition is reached, a “rage quit” is triggered, halting all governance activities until the opposing stakers have exited the protocol.

The introduction of this feature is designed to mitigate governance capture risks and ensure that Ethereum stakers are not excluded from governance decisions they disagree with. It addresses long-standing issues regarding the power disparity between those who actively stake ETH through Lido and those who hold LDO tokens. The new system acts as both a signal of contention and a safety mechanism, preventing rushed or potentially harmful proposals from being executed without giving stakers time to respond. It also provides a clearer path for those who stake ETH through Lido to exit if they disagree with the DAO’s direction.

The dual governance model incorporates several safety measures, including a Reseal Committee to control delays, a Tiebreaker Committee to break deadlocks, and an Emergency Committee to step in the event of a critical failure. The LDO token has not responded positively to the update, dropping 2% in the last day and 13% in the last month, indicating market caution as the new system is implemented. This framework marks one of the most advanced DAO structures introduced in decentralized finance, aligning incentives between stakers and token holders to create a more resilient and inclusive governance process for Ethereum staking.

The approval process for the dual governance model involved a two-phase voting system. The main phase concluded with 53.6 million LDOs voting in favor, just above the required quorum of 50 million LDOs. Only one person cast a "No" vote of 1.18 LDOs, indicating a high level of community support for the proposal. The remaining "objection" phase, where LDO holders can vote "No" or change their vote from "Yes" to "No," is expected to finalize the proposal on June 30 at 17:00 (GMT+3), unless there is a large-scale organized counter-campaign.

Under the new governance structure, stakers can register their objections to a proposal by depositing their stETH assets into a special “escrow contract.” If 1% of the total staked ETH is deposited, the proposal will be postponed for five days. As the percentage of stETH deposited increases, the postponement period extends. If the threshold reaches 10%, the proposal will be completely frozen, and the protocol will enter “Rage-Quit” mode. In this scenario, dissenting stakers can withdraw all their assets, or Lido DAO can cancel the proposal entirely. During this period, no new proposals will be implemented.

Ethereum co-founder Vitalik Buterin expressed support for the two-way governance structure, highlighting that this system creates an independent security layer, particularly against malicious actions. Buterin emphasized that this change allows Ethereum stakers to position themselves as true rights holders within the Lido ecosystem. The Lido team described this change as one of the most significant protocol upgrades in the entire Lido ecosystem, underscoring the importance of this governance overhaul.

The dual governance model is expected to bring about a more balanced and inclusive decision-making process within the Lido DAO. By giving stETH holders a veto over LDO-related decisions, the new system aims to prevent LDO holders from approving proposals that could negatively impact Lido’s stakers or the broader Ethereum ecosystem. This move is seen as a major step towards ensuring that the interests of all stakeholders are protected and that the Lido ecosystem continues to thrive.