The cryptocurrency market has seen significant activity from prominent venture capital funds, large investors, and traders over the past 30 days. These movements involve various digital assets, including $GNS, $DYDX, $GMX, $RDNT, $DPX, $ARB, $LDO, $ETH, $BTC, $MATIC, and $AAVE.
Among these activities, BitMEX co-founder and trading enthusiast Arthur Hayes purchased 758,000 $LDO—the native token of Lido Finance—at an average price of $2.53 during 2022. However, he sold all of them at a loss in March of this year at $2.42.
Some sources suggest his average purchase price may have been $2.26 or $2.35, which could mean he realized a small profit. Nevertheless, the sale came just as the Shapella upgrade—combining the Shanghai and Capella upgrades—was about to be implemented.
This upgrade allows staked $ETH to be redeemed, which is expected to increase participation in staking and expand the Ethereum LSD (Liquid Staking Derivatives) sector. Hayes had previously expressed optimism about Ethereum’s Merge, the LSD sector, and leading project Lido. So, why did he decide to sell his $LDO holdings after six months?
The Shift in Staking Strategy
In December of last year, I launched my crypto family office fund, Maelstrom Fund. I brought on Akshat Vaidya, former Head of Corporate Development at BitMEX, to identify promising crypto projects worldwide. Our goal is to invest in early-stage projects that can deliver returns exceeding those of simply holding $BTC and $ETH.
Akshat periodically shares his insights on exciting crypto sectors. While we are investing our own capital, we also aim to educate the market on why these projects matter for advancing decentralization. Ultimately, we want to support teams that offer alternatives to the traditional financial system.
The following discussion focuses on the movement toward decentralizing Ethereum network validators. This area is highly dynamic. I previously expressed a bullish outlook on Ethereum’s Merge by accumulating $ETH and $LDO in my portfolio. However, I always harbored concerns about Lido’s level of decentralization. I feared that once the market started paying attention to this issue, the token could plummet.
After Akshat invested in Obol and ether.fi and explained his reasoning, I knew it was time to sell my $LDO.
The Coming Restructuring of $ETH Staking
Since I entered the crypto industry, “Not your keys, not your crypto” has been a guiding principle. Yet traders, investors, founders, and even fund managers repeatedly make mistakes, losing control of private keys and resulting in billions of dollars lost or stolen—from Mt. Gox to FTX and everything in between.
Before DeFi Summer (around 2020), investors typically lost funds through mismanaged or fraudulent CeFi exchanges. In 2021–2022, the problem resurfaced in a new form: so-called “decentralized” (but ultimately custodial) cross-chain bridges were compromised by hackers, with losses exceeding $2.5 billion.
Given the inherent properties of blockchain, losing control of private keys—whether to CeFi or “decentralized” entities—should not be a compromise anyone makes. Yet here we are in 2023, and in our desire for simple $ETH staking rewards, dangerous practices are reemerging.
In the post-DeFi Summer era, we have come to expect yield on our cryptocurrencies—especially $ETH, particularly given recent Federal Reserve rate hikes. However, since setting up a validator remains technically challenging, investors face a choice: use risky custodial services or leave their $ETH idle.
Worryingly, many choose the former, entrusting their private keys to:
- Fully centralized services like Coinbase, Kraken, and Binance.
- Early decentralized ETH LSD protocols like Lido Finance.
To be fair, these custodial services and protocols have been crucial stepping stones toward a trustless, decentralized future for $ETH staking. However, they also prioritized speed to market at the cost of exposing stakeholders to potential node operator risks, regulatory risks, and security risks.
Fortunately, this dilemma is nearing its end. The Shanghai upgrade (part of Shapella) is being implemented, allowing stakers to withdraw staked $ETH for the first time (with a daily withdrawal limit of 0.4% of the total staked ETH). Over 18 million $ETH—about 15% of the circulating supply, worth hundreds of billions of dollars—will soon be freed from the constraints of high-risk custodial business models.
Existing $ETH staking services stand to lose the most in terms of market share and may benefit the least from the millions of $ETH likely to be staked in the coming years. Among these, Lido—the largest and first decentralized LSD protocol—may be the biggest ticking time bomb.
How Shapella Challenges Lido’s Dominance
Lido controls about 75% of all $ETH locked in LSD protocols and about 30% of the total staked $ETH. Its model is fundamentally built on validators’ trust in node operators:
- Validators deposit $ETH, but node operators do not contribute capital (unlike Rocketpool’s model, where node operators contribute 16 ETH per validator).
- Node operators generate keys (including BLS private keys and validator keys) instead of stakers and manage the redemption process for staked $ETH on a voluntary basis.
- This means validators have no direct claim to their $ETH or staking rewards—only to a hypothetical pool of assets generated by the protocol itself (similar to the business model of cross-chain bridge Wormhole, which was hacked last year).
To be clear, Lido works because node operators choose to cooperate. If node operators become unwilling or unable to exit their validators (to redeem your $ETH and staking rewards), you could be in trouble. Lido has taken some measures to mitigate risks, such as hacker breaches of validator keys or regulatory actions preventing node operators from processing redemptions.
However, Lido’s redemption process will only be tested at scale after the Shapella upgrade on April 12. Until now, it has been a one-way street. Ultimately, node operators could simply refuse to exit, effectively making your staked $ETH illiquid and inaccessible for a period, with limited downside risk for themselves.
In short, Lido’s model—and its node operators’ revenue model—depends on you giving up your private keys and bearing most of the risk, all for a 4–6% yield on your valuable assets. Sound familiar?
Fortunately, we no longer need to take this risk. Lido’s architecture may have been sufficient in the early stages, but withdrawal credentials at the execution layer are not enough to make an LSD protocol non-custodial. We now know that simply creating a smart contract-controlled redemption mechanism as a workaround is not feasible.
So, how do we design Ethereum staking services that are both non-custodial and scalable?
Investing in Decentralized Solutions
In December 2022, amid the collapse of numerous custodial business models, we launched Maelstrom to invest in projects addressing these flaws. We focus on ETH staking infrastructure projects that:
- Directly compete with high-risk custodial models (both fully centralized and early decentralized).
- Complement existing services to help them further decentralize.
Our first investment in the second category was Obol Labs, which we invested in this January. Obol doesn’t compete with Lido or Coinbase but helps them eliminate single points of failure. Obol’s Distributed Validator Technology (DVT) middleware allows validator keys to be “split” among multiple node operators, effectively creating a “multisignature” validator that can run simultaneously on multiple machines. These multi-validators interact with the beacon chain as one, avoiding penalties or slashing while enhancing the security and decentralization of $ETH staking.
On the other hand, ether.fi is our first investment in the first category, aiming to evolve beyond the legacy custodial models of Lido and Coinbase. ether.fi is building one of the first truly non-custodial staking protocols for Ethereum (and future PoS networks).
In the post-Shapella era, stakers can freely move between staking services to chase the highest APY. But ether.fi competes on different grounds. With ether.fi, stakers generate and control their own keys throughout the staking process—from creation to redemption—and can exit validators at any time to reclaim their $ETH, preventing node operator misconduct. It truly embodies “Your keys, your crypto.” ether.fi reduces risks for all parties, including node operators, who no longer need to maintain wallet connections or rely on trusted intermediaries for coordination.
Giving up control of your private keys is not a compromise you should have to make to participate in any decentralized ecosystem. Existing services and protocols in $ETH staking—whether centralized or early decentralized—prioritized speed to market. But storm clouds are gathering for these players, as new projects are being built to offer trustless, truly non-custodial $ETH staking solutions. With the Shapella upgrade, the shackles are finally off.
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Frequently Asked Questions
What is the Shapella upgrade?
The Shapella upgrade combines the Shanghai and Capella upgrades, enabling the withdrawal of staked Ethereum for the first time. This is expected to increase staking participation and improve liquidity in the ecosystem.
Why did Arthur Hayes sell his LDO tokens?
Hayes sold his LDO due to concerns about Lido’s decentralization. He believes that as the market focuses more on this issue, Lido could face significant challenges, especially with new non-custodial staking solutions emerging.
What are the risks of using Lido?
Lido’s model requires users to trust node operators with their private keys. If node operators fail to cooperate during the redemption process, users could experience delays or loss of access to their staked ETH and rewards.
How does ether.fi differ from Lido?
ether.fi is non-custodial, meaning users retain control of their keys throughout the staking process. This reduces risks associated with node operator misconduct and aligns with the principle of “not your keys, not your crypto.”
What is Distributed Validator Technology (DVT)?
DVT, pioneered by projects like Obol, allows validator keys to be shared among multiple node operators. This enhances security and decentralization by eliminating single points of failure.
Can I switch staking providers after Shapella?
Yes, Shapella enables stakers to withdraw and move their ETH between different staking services, allowing them to pursue better yields or more secure options.