Excitement for the Shanghai Upgrade, the next stage in Ethereum’s move to proof of stake, is reaching fever pitch. Staking platform Lido, the biggest player in the space, announced Saturday that it had recorded its highest daily inflow of staked tokens of 150,000 ether worth approximately $240 million.

TRON founder Justin Sun, who also doubles up as a diplomat, staked the tokens. In an appearance on CoinDesk’s show this morning, Sun said he believed in the future of decentralized staking services like Lido after regulators shut down Kraken’s staking program. Except Lido is hardly decentralized.

A Sham Case of Decentralization

On the surface, Lido claims to be a decentralized service that uses self-executing smart contracts to accomplish some of its tasks, such as bundling tokens into packets of 32 Eth – the required amount to become a validator. As Lex Sokolin, chief cryptoeconomist at research firm ConsenSys, explained to CoinDesk: There’s not a crypto exchange management team that’s working on your behalf pooling your money.

But it is very much a centralized affair.

In an interview last year, Jacob Blish, head of business development at Lido, revealed that only whitelisted operators that adhere to the platform’s validator requirements are selected to operate nodes for the service.

“Not anyone can become a node operator (for Lido),” said Blish and explained that the platform needed validators to remain available 24X7 to enable staking. Thus, Lido’s promise of staking rewards to customers depends on its efforts to fashion a semi-custodial service by seeking out appropriate third parties, in this case validators, for its service.  

Lido’s efforts to generate profits for its customers do not stop there.

Rebasing and MEV

It rebases tokens on its service. Rebasing involves manipulation the supply of staked tokens to maximize rewards. For example, Lido might rebase the numbers of stETH, the token that generates rewards on its service, in a customer’s wallet to decrease its supply to increase rewards per token.  

Lido also runs nodes that use algorithms containing Miner Extractable Value (MEV) boost – a practice that resembles front running in mainstream markets – to reorder transactions based on fees to maximize profits and enhance staking rewards on its nodes before committing them to Ethereum’s blockchain.

The stETH Token

Then there’s the stETH token. This token underpins Lido’s staking operations for Ethereum. It is a portable version of the ether that is staked on Lido and has a value pegged to its base crypto. It is this token that generates rewards for Lido customers.

But you do not need to stake ether on the platform to gain staking rewards. stETH is traded at unregulated exchanges like Binance and ByBit. One can purchase it there, import it onto Lido using their wallet, and begin accruing rewards from the service.

The same holds true for other staking tokens, such as stSOL and stMATIC, that are available on the platform. Essentially, Lido’s purported staking service is a scheme to generate profits.

Blish, head of Lido’s business development, explained last year that stETH’s ambition was to become the most widely used token on Ethereum’s platform and replace ether as a mechanism for conducting transactions on the blockchain. He said ether would only be used as gas for transactions in the future.

A “Cautious” Ether price  

Talk of staking leads us to discussions of price action for ether in March. Ethereum’s native token has not seen much action since the jump in its price last August in anticipation of the Merge. Enabling withdrawal facility for staked tokens at the end of this month might release a flood of ethers, and boost selling pressure for the token, in crypto markets.

Until then, however, ether price is expected to remain cautious, per analysts at Bernstein Research. They have a positive take for ether’s price after the upgrade. According to them, there will be “little selling pressure” daily on ether’s price, meaning its price is not expected to respond in a volatile manner to the event. They also expect the enabling of withdrawals to boost demand for ether.

Ether, as I have written earlier, has no verifiable use case beyond speculation. Staking offered one way for investors to generate returns from what is essentially a worthless token in its current form.

For ether to sustain demand over the long term, it will have to sustain those promised returns for investors. In an unlocked form, and with multiple regulatory pitfalls (one of which is outlined above), it is difficult to make a case for an increase in ether’s price. The question, then, is not whether withdrawals will take time or their effect on price. The question is whether ether can survive a withdrawal apocalypse.