A recent major news event, largely overlooked by the market, is that Lido is 'moving' over 8 million ETH (approximately $16 billion USD).
Of course, this does not involve transferring funds from Lido to a new protocol. Instead, it is about migrating the hundreds of thousands of legacy validators underpinning stETH to the new validator architecture introduced after the Pectra upgrade.
According to Lido's plan, more than 265,000 validators using the old 0x01 withdrawal credential will gradually be consolidated into a smaller number of validators with higher balances using the 0x02 credential. After the migration is complete, the total number of validators on the Ethereum network is expected to drop from about 880,000 to approximately 628,000—a reduction of nearly one-third. The number of attestation messages needing to be propagated per epoch may also decrease by about 29%.
This will not directly lower the gas fees paid by ordinary users, nor will it suddenly speed up transaction confirmation times. In fact, to complete the migration, Lido estimates a temporary reward loss equivalent to roughly 0.28% of the protocol's annual staking rewards.
Given that the potential revenue increase is limited and the migration itself incurs costs, why is Lido still pushing forward with this 'move' on a scale of tens of billions of dollars?
The answer lies in a significant change brought by the Pectra upgrade in May 2025—the Compoundable Validator.
I. What Exactly Is Lido 'Moving' with 8 Million ETH?
The Pectra upgrade officially launched on the Ethereum mainnet on May 7, 2025.
Among its changes, EIP-7251 increased the maximum effective balance for a single validator from 32 ETH to 2048 ETH and introduced withdrawal credentials starting with '0x02'. Validators using this new credential can retain their consensus layer rewards in the beacon chain balance, gradually increasing their effective balance and generating new rewards. Hence, they are called 'Compoundable Validators.'
On the surface, this simply hardcodes 'auto-compounding of rewards' into the protocol. However, the deeper change is that it breaks the long-standing fixed 32 ETH structure of Ethereum validators.
As is well known, the effective balance cap for an Ethereum validator has always been fixed at 32 ETH. Whether it grows to 33 ETH or higher subsequently, the effective balance that actually participates in consensus reward calculations remains capped at 32 ETH. Any amount exceeding this limit does not increase its validation weight but is periodically transferred to the execution layer withdrawal address.
For individual stakers running only one or a few validators, to have their rewards continue participating in native staking, they must gather dispersed rewards from different validators until they reach 32 ETH again, making the reinvestment threshold relatively high, and smaller amounts of ETH remain outside the staking system in withdrawal addresses.
Meanwhile, for entities like Lido, large exchanges, and professional staking service providers, while they can aggregate scattered rewards from numerous users more quickly to amass new 32 ETH increments, they face another cost—every additional 32 ETH typically requires creating and maintaining a new validator.
As Ethereum's staking scale continues to grow, the number of validators keeps expanding, along with the associated indexing, keys, signatures, and attestation messages, driving operational and maintenance costs ever higher.
EIP-7251 introduced in the Pectra upgrade aims to change this structure.
Under the new 0x02 model, the minimum threshold to activate a validator remains 32 ETH, but the maximum effective balance for a single validator is increased to 2048 ETH. This means rewards no longer have to be automatically transferred out but can remain in the validator, continuing to increase its effective balance and generate new rewards.
At the same time, multiple existing validators can be merged. For example, 2048 ETH originally distributed across 64 validators can be consolidated into one high-balance validator. The total staking weight remains unchanged, but the number of validators, keys, and network messages that need to be maintained is significantly reduced (see extended reading: "After a Year, 'Lean Ethereum' Sets Out Again: What Answer Does Ethereum Want to Deliver?").
Ultimately, the funds do not leave Ethereum, and the economic security provided is not diminished, but the operational burden is substantially lowered.
What Lido is promoting is precisely this kind of consolidation.
So, strictly speaking, the 'compounding' aspect of the Compoundable Validator only explains half of its value. The other half lies in the fact that validators can finally be reconfigured from a large number of standardized 32 ETH units into more streamlined infrastructure better suited for large-scale operations.
II. What Kind of Revenue Improvement Can It Bring?
Interestingly, from a pure revenue perspective, the improvement brought by compounding is not uniformly distributed.
Theoretically, both individual stakers and large institutions can reduce idle balances through 0x02, allowing rewards to participate more directly in subsequent staking. However, because different participants originally had varying capabilities in fund management, the marginal benefit of the upgrade is not the same for everyone.
A paper published in June 2026, "When Staking Rewards Compound: Measuring the Impact of Ethereum's Pectra Upgrade," compared the performance of 0x01 and 0x02 validators.
Simulation results showed that within the balance range of 32 ETH to 2048 ETH, the average consensus layer APR for 0x01 validators was about 2.17%, while for 0x02 validators it was about 2.26%. This represents a relative improvement of approximately 4.7% for the latter. However, when the staking scale reached between 8192 ETH and 10240 ETH, the relative gap between the two narrowed to about 0.3%.
It's crucial to note that the paper's mention of "about 4.7%" does not mean the APR directly increases by 4.7 percentage points. It refers to a relative improvement of roughly 4.7% on top of the original consensus layer APR of about 2% to 3%.
The reason smaller-scale stakers see more noticeable improvement is not because they have some exclusive yield, but because they previously faced greater difficulty in reinvesting.
For example, a user with only one 32 ETH validator would have their rewards automatically sent to a withdrawal address. They would then need to accumulate for a long time or combine with other funds to reach 32 ETH again and launch the next validator. Amounts less than 32 ETH would remain scattered across different addresses, naturally leading to lower aggregation willingness.
The 0x02 validator, however, allows these funds to continue increasing the effective balance within the same validator, thereby reducing idle funds formed by "amounts less than 32 ETH." Ultimately, what small-scale stakers lacked in the past wasn't just the willingness to reinvest, but also the ability to funnel scattered ETH back into native staking.
Large staking service providers can also benefit from native compounding, but they originally possessed stronger fund aggregation capabilities. They could quickly gather new 32 ETH increments to launch the next validator. From the perspective of the entire fund pool, they could achieve a fund allocation effect close to compounding.
Therefore, the larger the staking scale, the lower the proportion of scattered balances relative to total funds, and naturally, the smaller the marginal improvement brought by 0x02.
However, this does not mean 0x02 is unimportant for large institutions.
On the contrary, the core problem large institutions face is shifting from 'how to make rewards continue generating yield' to 'how to manage more ETH with fewer validators.'
For them, the value of 0x02 is more evident in two aspects: First, rewards can remain in the validator for compounding, reducing frequent aggregation, redeposit, and validator creation operations. Second, a large number of existing 32 ETH validators can be merged, significantly lowering the management costs associated with nodes, keys, and consensus layer messages.
Of course, this change also brings new trade-offs.
Traditional 0x01 validators automatically transfer rewards exceeding 32 ETH to withdrawal addresses, requiring no active on-chain operations. In contrast, 0x02 validators default to retaining rewards within the validator. If large service providers need to meet user redemptions or manage liquidity, they must actively initiate partial withdrawals and redesign their accounting, reward distribution, and capital buffer mechanisms.
Thus, for small-scale stakers, the most direct value of 0x02 is lowering the reinvestment threshold and reducing idle funds. For large institutions, while the yield improvement might be smaller, the benefits from validator consolidation and infrastructure efficiency gains are more significant.
Both benefit from the same mechanism, but the sources and priorities of their benefits differ.
III. The Changing and Unchanging Aspects of Ethereum's Staking Ecosystem
Therefore, if viewed solely from an APR perspective, Lido's migration doesn't seem like an exceptionally attractive deal.
After all, the yield improvement large service providers gain through compounding might be less than 1%, and there will be temporary reward losses during the migration. Existing accounting, withdrawal, and liquidity management systems also need to be adjusted accordingly.
Yet, Lido has decided to push forward with this largest core architecture upgrade since V2 in 2023. This is because when a protocol manages over 8 million ETH, the sheer number of validators itself becomes a cost.
Especially after the Pectra upgrade, a single 2048 ETH validator can carry the staking weight equivalent to 64 traditional validators, meaning it can manage more capital more efficiently with fewer validators.
In fact, Lido's upgrade involves more than just merging validators.
After migrating to Curated Module v2, its professional node operators are for the first time required to lock ETH as collateral. If operational outages, slashing, reward mismatches, or other attributable issues occur, this collateral can be used to cover losses.
In the past, Lido's curated node operators primarily relied on historical performance and reputation for trust. Now, reputation remains, but it is supplemented by a layer of real capital constraint. The existing 34 curated node operators are all expected to migrate to CMv2, with none opting out due to the collateral requirement.
This change might be more noteworthy than compounding itself, indicating that the competitive standards for Staking in the post-Pectra era are undergoing a structural transformation. Future differences among staking services may increasingly manifest in how to improve effective capital utilization, manage withdrawals and liquidity, allocate validator risk, and achieve balance between asset control, operational complexity, and yield.
For user-facing gateways like wallets, their value will no longer be just about displaying a yield number to users. They will increasingly need to help users understand the fund flows and risk structures behind different staking methods. Taking imToken Stake as an example:
- Currently, users can directly access the staking function from the ETH asset page and choose appropriate services based on their capital size and needs. For users wishing to participate with smaller amounts, they can complete the operation through integrated staking services within the wallet.
- For users holding more than 32 ETH who wish to retain asset control, they can also opt for non-custodial validator solutions, participating in Ethereum's native Staking without maintaining their own nodes.
As compoundable validators become more widespread, the content such gateways need to present will also increase. For instance, whether rewards auto-compound, when rewards can be withdrawn, which withdrawal credential the validator uses, who controls the funds, and the technical and liquidity risks associated with different schemes.
This also means wallets are connecting not just to a Staking yield page, but to a set of increasingly differentiated validator services.
Conclusion
Overall, from The Merge to the Shanghai upgrade, and now to the Pectra upgrade, Ethereum is gradually completing the staking lifecycle.
The Merge made validators the core of network security. The Shanghai upgrade addressed how staked funds exit. The Pectra upgrade is now further optimizing how funds enter, accumulate, and are reorganized.
Of course, compoundable validators will not bring the same magnitude of yield improvement to all participants:
- For small-scale stakers, it can reduce idle balances, allowing long-held ETH to participate more fully in consensus.
- For large institutions, its more significant value may lie not in increasing APR, but in reducing validator counts and lowering operational burdens.
Therefore, the migration to 0x02 validators is destined to be gradual. Different participants will choose to retain their original validators or gradually shift to the compoundable model based on their capital scale, liquidity needs, and operational structure.
However, the way Ethereum organizes staking capital is undergoing a step-by-step structural transformation. Especially now that validators are no longer fixed at 32 ETH, the Staking ecosystem is also shifting from standardized yield products towards more segmented fund management and infrastructure competition.
This is the paradigm shift in Ethereum Staking worth tracking over the long term.
