As it faces allegations by the U.S. Securities and Exchange Commission, liquid staking leader Lido is preparing to become more decentralized by taking a step toward integrating a more diverse set of Ethereum node operators, such as solo stakers, the “gold standard” for staking, per the Ethereum Foundation.

On Monday, a Lido initiative called Community Staking Module, which is expected to allow permissionless entry for node operators, activated on the Holesky test network, according to a governance post in Lido’s forums by Dmitry Gusakov, the tech leader of Lido’s community staking product.

The move comes days after the SEC implied in a lawsuit against Ethereum software provider Consensys that Lido’s liquid staking token, stETH, is an unregistered security. Staked ETH, aka stETH, represents a person’s principal amount of staked ETH and their staking rewards from helping secure the Ethereum blockchain network. 

Lido’s stETH has a market cap of $33 billion, making the liquid staking provider the leading DeFi protocol by total value locked. According to a Dune Analytics dashboard by crypto analyst Hildobby, Lido commands a 29% share of the total 33.3 million staked ETH.

The advent of Lido’s community staking module marks a change to the protocol that first introduced liquid staking in 2020, because Lido on Ethereum has had a curated and permissioned validator set since its inception, in which those interested in acting as a node operator for Lido had to be vetted by the Lido DAO. 

Permissioned and Restricted Since Inception

Unlike its competitor Rocket Pool, before a node operator can conduct validator operations for Lido, governance has to vote on whether to include a prospective address into Lido’s active set of node operators. At presstime, Lido has 39 node operators, which includes the likes of, Chorus One, and Consensys. 

The initiative centered on permissionless entry allows “any node operator – and especially community stakers, from solo stakers, to groups of friends, to amateur operators – to operate validators by providing an ETH-based bond (security collateral),” according to its documentation.

The new community module is expected to make solo staking more accessible through its inclusion of several features such as a low bond for node operators as well as smoothed rewards from Ethereum’s execution layer and maximum extractable value. 

Lido becomes less centralized by making its node operator set permissionless. During the lifecycle of a crypto project, a protocol will typically start with heavy elements of centralization, ranging from core developers holding control over the direction of the project, sometimes in the form of fundraising to delaying a protocol’s token generation event that aims to introduce governance mechanisms for those in the community. 

Eventually, founders and core members of a protocol would introduce decentralization initiatives, such as implementing onchain voting processes or making node operation permissionless such as the case with Lido. 

SEC’s Focus on Consensys and Lido

Although, like most DeFi projects, Lido has had a roadmap to decentralization for a while, the initiative comes several days after the SEC charged Consensys for offering and selling unregistered securities, namely Lido and Rocket Pool’s liquid staking tokens, through Metamask, a crypto wallet where people can stake and swap cryptocurrencies. 

Consensys, which is also a node operator for Lido, “has offered and sold tens of thousands of unregistered securities on behalf of liquid staking program providers Lido and Rocket Pool, who created and issue liquid staking tokens (called stETH and rETH) in exchange for staked assets,” the SEC’s press release states

Read More: Could the SEC Have a Case Against Liquid Staking Protocols?

The complaint calls Lido and Rocket Pool issuers of unregistered securities, alleging that their staking programs “are each offered and sold as investment contracts and, therefore, securities.” 

Following the prongs of the so-called Howey test, which, since a 1946 court case, has been the legal measure to determine whether an investment is a securities offering, the agency said these liquid staking tokens meet the criteria. 

In its press release it said, the buyers of LSTs “make an investment of ETH in a common enterprise with a reasonable expectation of profits from the managerial efforts of Lido and Rocket Pool, respectively.” However, neither Lido nor Rocket Pool has filed registrations to offer these securities with the SEC. 

With the fourth prong of the Howey test being “the managerial efforts of others,” crypto projects have sought to be decentralized enough that such a third party could not be easily named. 

When Unchained reached out to the founders and key members of Lido in May for commentary on whether the SEC took action against the liquid staking provider or contacted them about stETH, Unchained did not receive a response. According to a snapshot vote taken in Aug. 2022, Eric Hill, who goes by @Rotorless on X, is Lido’s head of legal and general counsel. However, when Unchained contacted Hill for commentary, he said he did not hold that position anymore and wasn’t “the right person to talk to.”

After the SEC’s lawsuit against Consensys, when Unchained highlighted SEC’s claims that stETH is an unregistered security, Lido marketing lead Kasper Rasmussen said, “We’re on it,” but did not provide additional insights. 

LDO, the governance token for Lido, has decreased 6.3% in the past 24 hours and 19.7% over the last 30 days to trade at $1.92, making its market cap stand at $1.7 billion, per CoinGecko

UPDATE (July 3, 2024, 3:08 p.m. ET): Added clarification on the timeline for Lido’s plan to make the process to become a node validator permissionless, as well as the way Lido founders and key members responded to queries about regulatory issues when Unchained reached out to them in May.