According to a fresh new proposal posted on Lido's governance forum earlier this week, the decentralized finance (DeFi) protocol Lido Finance proposed halting its liquid staking operations on two blockchain ecosystems, namely Kusama and Polkadot.

In this proposal, Lido partner and decentralized finance applications developer firm, MixBytes announced that it would stop developing and providing technical support to Lido on Polkadot and Kusama liquid staking protocols as of 1 August 2023.  

According to Kosta Zherebtsov, chief product officer of MixBytes and the author of the proposal,

“The decision was made because of several challenges, including market conditions, protocol growth, limited capacity and priority alignment.”

Lido is currently the largest player in the decentralized finance sector with the most amount of total-value-locked (TVL) in DeFi. It has nearly $9 billion worth of tokens locked in its liquid staking protocol. Its meteoric rise in the last couple of years has come especially due to the staggering growth in the investor demand for liquid staking.

Staking is an extremely popular yield-earning strategy in the digital asset space where crypto asset holders can lock up their idle holdings and delegate those tokens to secure Proof-of-Stake blockchains in exchange for a reward. The benefit liquid staking essentially provides is that investors can keep their capital liquid and at the same time use their staked tokens as collateral by receiving derivatives in exchange. Thus, these investors can sell off these derivatives whenever they want and not be stuck due to any lock-in period mandated by many staking protocols.

This became especially popular after the launch of Ethereum's Beacon Chain back in December 2020, where one had to stake 32 ETH or upwards to become a validator on the network. While this had its benefits, the amount of ETH tokens that needed to be staked was too high for the usual retail investors and thus, Lido was launched alongside the launch of the Beacon Chain to appeal to retail investors who wanted to stay liquid while at the same time wanted to contribute to secure Ethereum's then-upcoming PoS chain.

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This proposal by MixByte is expected to affect some $25 million worth of assets locked up in both these ecosystems. Polkadot and Kusama have a combined weightage of about 0.28% of Lido's total TVL in DeFi. According to data from DefiLlama, investors have staked about $22.3 million worth of DOT and $2.34 million worth of KSM tokens. DOT and KSM are native crypto assets of Polkadot and Kusama respectively.

MixByte's Zherebtsov also suggested halting acceptance of new DOT and KSM tokens for liquid staking by 15 March and also ensuring automatic unstaking of these tokens later in the month of June in his proposed timeline in Lido's governance forum. It must be noted that the proposal is still in the discussion stage yet and no actual decisions have been taken yet.

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