The Ethereum stake pool market is still in its infancy. But now it has reached a major maturity milestone with Shapella.
As this liquid staking market has grown, it has shown itself vulnerable to “winner takes all.” In it, top players have the ability to disrupt the decentralization that brought value to Ethereum in the first place.
With Shapella (combining upgrades from Shanghai and Capella), liquidity staking has taken another major step on the road to maturity. Now is a critical time to steer the industry in the right direction—towards greater decentralization.
The Threat of a Liquidity Staking Monopoly
The amount of ETH locked in liquid staking pools has skyrocketed over the past two years to 7.6 million, accounting for more than 40% of all staked ETH.
While this may seem like a large number, the total stake represents only 15% of the total ETH supply – compared to around 50% to 75% stake participation in other PoS blockchains that already allow withdrawals. This is only a small part.
Having a dominant liquid staking protocol, or even a centralized staking service provider, has several advantages. A single protocol makes it easier to trade staked ETH while preventing liquidity from being allocated to too many staked tokens. As is often heard in traditional finance, liquidity begets liquidity.
But at a certain point, this dominance becomes toxic. Node operators that are tied together operationally, politically, or through liquidity staking governance tokens are more likely not to function as a single unit with significant impact on the network.
If this single protocol controlled less than a third of ETH, they probably wouldn’t pose a threat. But if this safety threshold is exceeded, it means that a single agreement can affect the entire blockchain.
Centralized entities are more likely to succumb to pressure to censor transactions or establish tight control over the network and capture the majority of MEV opportunities. Passing these superior rewards on to users (and even retaining the extracted value for themselves) will further strengthen the protocol’s position as a market leader, creating what researchers want. ETH Research Danny Ryan calls it a “huge competitive reward” that could incentivize potential stakeholders not to choose other protocols.
Even ignoring improper incentive structures, smart contract bugs, or bugs that lead to massive slashing events by dominant staking providers can lead to very serious losses, shaking confidence in the entire Ethereum ecosystem.
These reasons and more are why many Ethereans — including the likes of Vitalik Buterin and SuperPhiz — believe that a single pledge agreement should have no more than 15% to 33% control.
put up Healthy Liquid Staking Market
In an ideal world, ETH holders looking to monetize staking would build their own validator infrastructure and independent “single staking” to maximize network security.
But in reality, most holders do not have the technical ability or 32 ETH required to stake alone. Instead, they opt for third-party solutions, such as liquidity staking protocols, which remove barriers to entry and provide liquidity rewards for their deployment elsewhere in DeFi.
To help create a liquidity staking market that doesn’t compromise Ethereum’s diversity or decentralization, liquidity stakers should do two things:
First, let’s ditch centralized and permissioned solutions in favor of ones that are more suitable for Ethereum. In other words, noncustodial, reliability-minimized protocols use diverse and flexible node operators, especially those wishing to leverage innovations that support ledger assistance.
Take, for example, Distributed Validator Technology (DVT), which allows a single Ethereum validator to be split across multiple nodes, increasing network resilience and reducing the risk of slashing. This reduces the risk of centralization even if a single staking provider gains dominance.
Second, liquidity stakers should realize the value of Ethereum. Decentralization, diversity, and censorship resistance are what ultimately give ETH value, and the best way to maintain them through liquid staking is to avoid fostering one’s excessive dominance. The only staking service provider.
Now is the time for net neutrality
Finally, looking at the overall ethos of Ethereum will help create a diverse staking market that includes many vendors, each with a relatively small market share, all competing fairly on the same platform.
Once Ethereum Shanghai upgrades and unlocks the ETH pledge withdrawal function, the prosperity of the liquidity pledge agreement will naturally accelerate. If left unchecked, these protocols potentially threaten to centralize Ethereum in their hands.
All we need to do is make sure people understand the risks of choosing what to do with their ETH.
- The giant Ethereum whale corrected its behavior in Shanghai ahead of schedule——Estimated to sell 170,000 ETH after the upgrade
- ETH dips below $1,900 as Shanghai looms — only 0.6% of validators choose to withdraw ETH
- As Bitcoin price hovers around $30K, a whale claims to own 23,500 Bitcoin worth over $710 million
According to Blockworks