Lido's dominance of LST concerns the Ethereum ecosystem is deflationary

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Lido's dominance of LST concerns the Ethereum ecosystem is deflationary

Lido's Dominance of LST sector continues to concern Decentralization advocates, despite the loss of Nearly 1 million ETH since Ethereum transitioned to proof-of-stake.

The Merge was a significant upgrade in Ethereum's history, promising to make ETH a deflationary asset while significantly reducing the carbon footprint of the network.

While Ether has traded sideways over the past 12 months, much has changed for the network's fundamentals. The issuance of cryptocurrencies is down more than 80%, with staking participation up 87%, and nearly 1 M ETH has been permanently removed from supply.

Although Ethereum is largely making good on its deflationary promise, new challenges have emerged in the network's decentralization.

The Merge took effect on Sept. 15, 2022, replacing proof of work with proof of Stake consensus.

The move revamped Ethereum's tokenomics, with daily ETH issuance down more than 80% from 13500 ETH to currently around 2,300 ETH. After the introduction of Ethereum's burn mechanism one year before, analysts predicted that Ethereum's ETH would become deflationary, resulting in more ETH being burned from base transaction fees than enters circulation as rewards for stakers.

The total amount of ETH in circulation is now nearly 300,000 fewer than at the time of the Merge. For comparison, a further 3.8M ETH would have been issued under proof of work.

The Merge also caused the 2023 surge in liquid staking tokens, assets holding an underlying position of staked Ether, which can be easily traded on exchanges or used in DeFi applications.

The upgrade in Shanghai also activated staked ETH withdrawals in April, lowering the price spread between ETH and popular liquid staking tokens and boosting the adoption of LSTs. Today, 9.8M ETH or 42.5% of all staked Ether is held by liquid staking protocols.

The top LST protocol, ETH locked in Lido, was up 82% from 4.6M to 8.6M since the year began, according to Dune Analytics. Cryptobase's LST token, cbETH, boasts 1.17M Ether, as well as Rocket Pool's rETH with 450,000.

Now that Lido has a third of staked Ethereum, many onlookers decry Lido, warning that a further increase in Lido dominance could facilitate governance attacks against the network if the protocol desired.

In May, Ethereum's chief scientist, Vitalik Buterin, proposed that staking providers controlling more than 15% of ETH must actively raise user fees to deter adoption until their dominance falls.

Buterin, 27, has been tweeting since appointing him.