Lido Finance Proposes Dual Governance, Giving stETH Holders Veto Power

Lido Finance, the leading liquid staking platform on Ethereum by locked value, has introduced a significant proposal aimed at enhancing its governance model. The proposal, known as Lido Improvement Proposal (LIP) 28, seeks to grant staked ether (stETH) holders direct voting power alongside existing DAO tokenholders. This move is designed to increase accountability and decentralization within the protocol, particularly as Lido continues to dominate Ethereum’s staking landscape, with over 25% of all ETH staked through its infrastructure.

The new governance system, dubbed Dual Governance, introduces a dual voting mechanism. Under this system, stETH holders, who stake ETH via Lido and receive a liquid token in return, will have the ability to participate in a veto mechanism on key protocol decisions. Currently, only holders of LDO, Lido’s governance token, have a say in how the protocol evolves. The proposed system allows stETH holders to veto certain proposals approved by LDO tokenholders, though the veto would not enable them to push proposals through unilaterally.

The Dual Governance system includes a special timelock contract between Lido DAO’s decisions and their execution. This contract gives stETH holders a way to intervene if they strongly oppose a proposal. The "dynamic" timelock is necessary because it is how on-chain governance technically works behind the scenes. In the current system, decisions don’t take effect right away, as there is a set period before they’re executed. This gives users time to react if they don’t agree with certain changes. However, Ethereum staking is different because one can’t quickly unstake or withdraw ETH, even with the current timelock. It takes time, liquidity is complex, and there is often a queue that could take several days to clear.

The new proposal aims to address these issues. The proposed dynamic timelock assumes that, as enough users who aren’t satisfied with a proposed change deposit their stETH (or wrapped stETH and withdrawal of NFTs) into a designated escrow contract for withdrawal, the timelock duration begins to increase — this is called crossing the “first seal” (set at 1% of total Lido ETH staked). If discontent continues and deposits cross the “second seal” threshold (10% of Lido’s ETH TVL), a "rage quit" is triggered: execution of the DAO’s decision is completely blocked until all protesting stakers have had the chance to withdraw their ETH. This creates a sort of safety valve — allowing stakers to signal objection and exit — while still giving the DAO time to respond or cancel the contentious action.

The plan comes as Ethereum has surged, riding momentum from its Pectra upgrade, which introduced execution-layer reforms to improve scalability and efficiency. The rally has sparked renewed attention on Ethereum-native applications like Lido, which is critical in capital flow and validator participation across the chain — and directly impacts ETH market structure. The LIP-28 proposal is still in its discussion phase, with a formal on-chain vote expected in the coming weeks. If approved, the change could shift how governance is distributed across Ethereum’s staking ecosystem, setting a precedent for other DeFi protocols seeking to include users, not just tokenholders, in decision-making. Lido's other competitors include Rocket Pool and Frax Ether.