With Lido currently holding more than 33% of liquid staking market share, the threat this poses to Ethereum is the talk of Crypto Twitter.
In our recent Twitter Space on the topic, Swell Founder Daniel and Chief Liquidity Surgeon Abishek were joined by Darren Langley from Rocket Pool, Mike Silagadze from EtherFi, and Diogo Costa from Ankr Staking.
Here are the key highlights in the form of quotes from our insightful speakers:
What are the potential downsides of centralization in the LST market?
“There are two major fundamental properties from a network perspective that bring Ethereum value: decentralization and security. The more decentralized and secure Ethereum is, the more valuable it is. Without sufficient decentralization and security, it is very difficult to ensure the continuation of Ethereum’s core values such as censorship resistance, credible neutrality and defensibility against capture. Overall, there are downsides to all centralized factors, however LST centralization in particular poses a specific risk to the principles and value propositions of Ethereum itself” – Daniel Dizon, Swell Labs
“The most insidious effects are the undermining of Ethereum’s core values. These core values are here because they are important for Ethereum’s mission which is to be a global settlement layer that is credibly neutral, censorship resistant and capture resistant. If Ethereum got captured by a jurisdiction or a corporate capture, then it would be in a very different place than where everyone would like it to be.” – Darren Langley, Rocket Pool
“There are multiple aspects of centralization that Ethereum or any blockchain faces. It is easy to focus on ones that are more salient, but it’s important to look at the ones that are less obvious – such as the high percentage of nodes held in a single US data center close to Washington” – Mike Silagadze, EtherFi
How much stake can an LST control before it becomes a threat to Ethereum?
“There are three critical consensus thresholds that pose a threat to Ethereum. These are: 33% market share: a liquid staking protocol could easily disrupt finality of the chain. 50% market share: a liquid staking protocol can start censoring blocks. 66% market share: the network is seriously compromised.
There has been a lot of discussion around how much is too much. I don't believe that any LST should hold more than 20% of ETH staked. When put into the perspective of Ethereum staking currently being a 38 billion dollar market, it is not irrational to place a specific cap on the amount of staked ETH that a protocol should be able to hold” – Darren Langley, Rocket Pool
What is the best way to prevent a single protocol from surpassing the threshold numbers?
“From Swell’s perspective, we have reflected on and have tried to adopt more economic and commercial levers to prevent centralization by trying to grow as fast as we can and presenting users with compelling offers, i.e. zero fee staking and the Voyage airdrop campaign. Overall, it is a multi-layered problem and multiple actors with different interests will play a role in either reinforcing centralization or moving us towards decentralization. Hopefully we see a rational and valuable outcome for everyone involved.” - Daniel Dizon, Swell Labs
“We have recently seen an influx in new entrants to the market. This is great as users have exposure to a number of permissionless, decentralized alternatives, however, it is important to ensure that these alternatives are credible.” - Darren Langley, Rocket Pool
“Education is the most important and also the hardest part to reduce the risks and foster decentralization. It is critical for users to understand the consequences of staking with a protocol that holds the majority of the market share. Cooperation between protocols that have less market share can work together to attract and delegate more staked ETH between them.” – Diogo, Ankr Staking
“There are obviously potential risks associated with this but I believe that mechanisms such as restaking could price decentralization. Staked ETH is a trade off of risk versus boosted yield, but restaking could potentially let you price decentralization and client diversity.” – Mike Silagadze, EtherFi
What does the ideal liquid staking market look like and are we moving towards it?
“An ideal liquid staking market should be one that is aligned with Ethereum. There is a duty from builders, DAOs, users and stakers to ensure that the risks are acknowledged and mitigated and we have a diverse set of LSTs that are harmonious towards the consensus thresholds. Based on the current rates of inflows and shuffle of LSTs, we are seeing a shift away from centralized actors to decentralized actors and a convergence of concentrated numbers of limited players.” – Daniel Dizon, Swell
“It is time to realize that decentralization is important and there is still more to be done by other protocols to create an environment of opportunities for LSTs. At the moment, we run the risk of only established LSTs having access to building the financial instrument into something more complex i.e. using LSTs as collateral or building more financial products on top of LSTs. I’d like to see the space move towards making the expansion of building on top of the base financial instrument more accessible to longer tailed LSTs rather than just the larger LSTs.” – Abishek, Swell Labs
“It would be better if the barrier to entry was not as high as it is. It takes an inordinate amount of time to build enough liquidity to satisfy some of the needs. Advances in zk oracles and/or other oracles that may be building at the moment could definitely help with that.” -- Darren Langley, Rocket Pool
Final Thoughts
“Governance is an inherent issue with staking protocols that unfortunately is necessary in the near term as protocols need to adapt to changes in Ethereum. In the future, I believe that there will be a big focus on how staking protocols are governed and how we can potentially ungovern them.” – Darren Langley, Rocket Pool
“Regardless of how a decentralized governance token may work, it is always terrifying if a user has a large amount of ETH sitting in a project that is one governance vote away from being captured. I believe this is a strong point that needs further emphasis.” – Mike Silagadze, EtherFi
Thank you to everyone for attending the Twitter Space.
You can listen to the recording here.
