This post is derived from insights shared in Segment 1 of Katashe DeFi Governance Radio, in collaboration with The Zeall Show, supported by ACCESS.

Decentralized Finance (DeFi) has transformed traditional financial systems, and liquid staking has emerged as a standout sector in crypto, uniquely solving the capital efficiency problem for Proof of Stake (PoS) blockchain token holders. As PoS chains dominate the top smart contract platforms, liquid staking protocols generated over $800 million in annual revenue across the top five chains in 2023. Unlike the cyclical earnings of decentralized exchanges or NFT marketplaces, this revenue is recurring and stable, highlighting the sector’s superior quality.

Lido stands at the forefront, capitalizing on the network effects of its $stETH token, a reliable track record, and a forward-thinking adoption of decentralized validator technologies like SSV and Obol. As one of the largest DeFi protocols, Lido enables Ethereum staking through a decentralized network of node operators, offering users Staked ETH (stETH) to keep their assets liquid. With approximately $19 billion in Total Value Locked (TVL), Lido is redefining staking and governance within the Ethereum ecosystem.

Unlike traditional staking, where assets are locked and illiquid, Lido allows users to stake ETH while retaining liquidity. This is achieved through stETH, which can be swapped for ETH on exchanges like Uniswap or redeemed for ETH through Lido’s withdrawal process. This model ensures that participants can continue to utilize their assets in DeFi activities while earning staking rewards.

Beyond its staking mechanism, Lido has expanded its validator network from 40 to over 300 independent node operators, introducing the Community Staking Module (CSM) to decentralize staking further. This initiative, supported by Katashe's participation as Governance Grove Delegates to Lido DAO, directs 1-2% of TVL to permissionless staking, enhancing validator diversity and reducing reliance on centralized points of failure.

Lido operates as a fully on-chain Decentralized Autonomous Organization (DAO), where governance decisions are enacted through a structured proposal and voting process:

1. Proposal Creation & Discussion: Community members publish proposals on Lido Research forums for feedback and debate.

2. Snapshot Voting: LDO token holders participate in a non-binding vote to gauge sentiment.

3. On-Chain Voting & Execution: If a proposal is approved, a final on-chain vote determines execution, ensuring governance transparency.

To improve efficiency, routine governance decisions—such as staking limit adjustments or ecosystem grants—are managed by specialized committees, including:

• Ecosystem Grants Organization – Allocates grants and rewards.

• Liquidity Observation Labs – Strategically allocates liquidity.

• Treasury Management Committee – Oversees financial operations.

Like many DAOs, Lido DAO uses off-chain signaling via Snapshot, but distinguishes itself by executing governance decisions directly through smart contracts on-chain with Aragon's tooling.

A central challenge in DAO governance is the concentration of voting power among large token holders (whales), a concern shared across many DAOs, including Lido. To address this and broaden participation, several DAOs have introduced public delegation programs, encouraging a more diverse set of contributors to engage in decision-making. In Asia, governance expertise often remains distinct from technical skills, with the former largely concentrated among traditional finance (TradFi) compliance professionals and academia. There is a talent shift to centralized exchanges (CEXes) and in-house legal counsel for top protocols. However, limited income prospects in decentralized governance combined with high voting power thresholds limit adoption and the cultivation of delegate expertise.

According to Governance Grove delegate Stakesaurus, governance challenges often stem from two primary gaps:

1. The Incentives Gap – On-chain voting incurs gas fees, discouraging participation. Lido’s incentivized delegation program, which allocates $150,000 in LDO tokens to active delegates, aims to address this issue.

2. The Skills Gap – Writing effective governance proposals requires thorough research and structured arguments. Lido enforces a code of conduct to ensure quality participation, discouraging low-effort submissions.

To address participation barriers, governance-focused communities have emerged, analyzing DAO proposals and educating contributors. Governance Grove has also initiated a governance reading community group to help drive education and engagement.

The regulatory landscape for DAOs remains uncertain. Participation in forums like the FATF Private Consultative Sector Forum highlights the challenges of regulating DeFi effectively. DeFi governance participants have attempted to collaborate with regulators, even anonymously, but face resistance with perceptions of risk and illicit activity. The key challenge lies in balancing DAO decentralization while addressing compliance concerns. One way forward is to unite in fighting a common threat. Scams pervade both decentralized finance (DeFi) and traditional finance (TradFi), presenting a shared challenge that regulators and industry stakeholders can address together. In Singapore alone, scam victims lost $1.1b to scammers in 2024. By focusing on this common threat, this approach could pave the way for collaborative dialogue and joint solutions, leveraging best practices in fighting cybercrime with cutting edge DeFi tooling for transaction monitoring.

As the regulatory landscape evolves, more collaboration between crypto innovators and compliance professionals is essential to establish best practices. Singapore, for instance, is a collaborative tech hub for supporting public private dialogue and initiatives in Web3, with industry bodies such as ACCESS, GFTN and more leading the charge.

Lido’s governance evolution aligns with broader trends in DeFi, where legal accountability and decentralized decision-making continue to intersect. DAOs like Lido resemble stewardship commons, with token holders managing a shared protocol, but whale dominance and the lack of legal precedents reveal a governance model still wrestling with centralization and accountability. As these tensions persist, the discourse around responsible stewardship continues to evolve with open governance models.

Lido Finance is leading the way in decentralized staking and governance, demonstrating how DAOs can function effectively while navigating decentralization challenges. By expanding its validator network, refining governance structures, and fostering community participation, Lido is setting a precedent for the future of liquid staking in DeFi.

As governance discussions continue to evolve, Lido’s model offers insights into how DAOs can balance decentralization, efficiency, and regulatory engagement. Whether through incentivized delegation programs, community-driven research initiatives, or enhanced legal frameworks, the ongoing evolution of Lido DAO provides a blueprint for the broader DeFi ecosystem to follow.