Ethereum Governance After the Merge

Lido's ~30% share of staked ETH creates a systemic risk, concentrating validator power and threatening network neutrality. The solution isn't to break Lido, but to build credible alternatives and enforce client diversity.

• DVT Networks: Projects like Obol and SSV enable decentralized validator operation, reducing reliance on any single node operator.
• Staking Derivatives: The rise of Rocket Pool, StakeWise, and EigenLayer restaking fragments the staking landscape.

Maximal Extractable Value (MEV) is a ~$500M+ annual market controlled by searchers and builders, creating unfairness and centralization. Post-Merge governance is about democratizing this value.

• PBS (Proposer-Builder Separation): A core protocol upgrade to separate block building from proposing, preventing validator-level MEV extraction.
• SUAVE: A chain-specific mempool and block builder from Flashbots, aiming to become a neutral, public utility for MEV distribution.

The Merge made the consensus layer (CL) client the ultimate authority. >66% dominance by a single CL client (Prysm) is an existential risk. Governance must actively fund and incentivize minority clients.

• Execution Layer Parallel: Geth's historical dominance shows the danger; post-Merge, the risk is higher as the CL client finalizes blocks.
• Incentive Programs: Initiatives like the Ethereum Foundation's Client Incentive Program are critical to subsidize Nethermind, Teku, and Lighthouse development.

With ~$30B+ in protocol-level MEV and fees, the debate over who controls this capital—the core protocol or dApps—is the next frontier. EIP-1559's burn was just the beginning.

• Protocol-Sourced Revenue (PSR): Proposals to direct a portion of transaction fees or MEV to fund public goods via mechanisms like retroactive public goods funding (RPGF).
• Application Layer Capture: Major dApps like Uniswap and Aave with their own treasuries may lobby against protocol-level redistribution.

Liquid staking providers now control >33% of all staked ETH. This creates a formalized cartel with the power to censor transactions or manipulate protocol upgrades. The economic majority is no longer a diffuse set of miners.

• Lido's DAO governance is itself dominated by a few whales.
• Regulatory capture risk if a major entity like Coinbase is forced to comply with OFAC.
• The social layer 'nuclear option' (slashing the cartel) would destroy ~$30B+ in value and user funds.

~85% of validators run Geth execution client software. A critical bug in Geth could cause a catastrophic chain split, freezing billions in DeFi TVL. The Merge eliminated client diversity as a miner-side concern, but validator homogeneity is now the supreme risk.

• Inertia is powerful: Validators are financially penalized for downtime during client switches.
• Minority clients (Nethermind, Besu, Erigon) lack robust economic security guarantees.
• A correlated failure would be an existential event, worse than any 51% attack under PoW.

Major dApps (Uniswap, Aave, MakerDAO) now have more leverage than core developers. Their threat to fork or migrate can veto upgrades, creating governance paralysis. The 'ultra sound money' narrative conflicts with the need for agile protocol evolution.

• ENS and Layer 2s (Arbitrum, Optimism, Base) have their own token-holder governance, creating competing power centers.
• Ethereum Foundation's influence is waning, creating a vacuum.
• Result: Innovation shifts to L2s, while L1 ossifies into a costly settlement layer for rollups like Starknet and zkSync.

Proof-of-Stake validators are legally identifiable entities, unlike anonymous miners. A state actor could compel ~66% of validators (e.g., via US/EU-based operators like Coinbase, Kraken, Binance) to finalize a malicious chain or censor specific addresses.

• This turns a technical Sybil attack into a legal compliance order.
• The 'minority soft fork' defense requires flawless coordination under duress.
• Staking-as-a-Service providers are the single point of failure, creating a more fragile system than Bitcoin's PoW.

Governance is now a function of client software implementation. The dominance of a single execution client (Geth) or consensus client (Prysm) creates systemic risk.

• Single-point failure risk: A bug in >66% client share could halt the chain.
• Social coordination burden: Enforcing client diversity falls to staking pools and solo stakers.
• Inertia vs. security: The network's health is a voluntary, opt-in security measure.

Liquid staking derivatives (LSDs) like Lido and centralized exchanges concentrate validation power. A coalition controlling >33% of stake can censor transactions and halt finality.

• Lido's governance dilemma: stETH holders, not node operators, vote on Lido DAO proposals.
• Regulatory attack surface: Centralized staking services are prime targets for enforcement.
• The trivial veto: Cartel formation is economically rational, not malicious.

With miners gone, the Ethereum Foundation and client teams (Nethermind, Besu, Teku, Lighthouse) hold ultimate implementation power through the Ethereum Improvement Proposal (EIP) process.

• The roadmap is policy: Decisions on PBS, Danksharding, and Verkle Trees are made by a technical elite.
• Soft power of execution: Stakers and apps can only adopt or fork; they cannot easily propose code.
• Coordination fragility: Relies on the continued alignment and goodwill of a small group.

Technical upgrades now require convincing $100B+ in staked ETH to follow. Governance is a marketing and persuasion game played on Twitter, Discord, and research forums.

• The fork is the vote: Contentious changes risk chain splits (see Ethereum Classic).
• Narrative dominance: Proposals live or die by their ability to capture community mindshare.
• Institutional inertia: Large stakers (Coinbase, Kraken) move slowly, creating lag.