Ethereum Liquid Staking Protocols Trigger Centralization, Unpecking Concerns

If Ethereum markets weren’t already in bad enough shape, centralization concerns have been raised over liquid staking protocols, with the most prominent already unpinning.

Major liquid staking protocols such as Lido are becoming a growing concern over the amount of Ethereum being staked there.

Lido offers liquid staking which allows users to deposit less than the 32 ETH required to run a full node on the Beacon chain. It also provides an equivalent staking token (stETH) that can be used in other DeFi protocols for additional returns.

At the time of writing, Lido had 4.2 million ETH staked, about a third of the total amount staked on the Ethereum consensus layer (formerly known as ETH 2.0).

Cartel Staking Rewards

Core Ethereum developer Danny Ryan has raised concerns about Lido’s dominance in staking. A centralized attack on the network could occur after switching to proof-of-stake if the majority of staking power is too concentrated, it warned in a recent article.

Ryan warned that problems could arise if a liquid staking protocol exceeds critical consensus thresholds such as 1/3, 1/2 and 2/3.

“The staking derivative can make outsized profits relative to unpooled capital due to coordinated MEV mining, manipulation of block timing, and/or censorship – the cartelization of the space of blocks.”

If that happens, stakers are discouraged from staking elsewhere “because of the outsized cartel rewards,” he added. He recommended that Lido and similar liquid staking products “self-limit for their own good”, and that capital allocators recognize the pooling risks inherent in protocol designs.

Lido is somewhat centralized having already received significant funding earlier this year from crypto venture capital giants including Andreessen Horowitz.

stETH depegging

Lido has other issues at the moment aside from any potential “cartelization” of the staking industry. Its staking Ethereum token, stETH, pulled out of the underlying asset after Ethereum sold off over the weekend.

ETH prices had fallen to $1,363 at press time, following a 10% loss in the past 12 hours. However, stETH, which should be at the same price, was trading at $1,294, 5% below its peg according to CoinGecko.

The Celsius crypto lending platform could be the root cause, as it contains a large amount of stETH. On June 13, the platform began sending millions of dollars worth of crypto assets (mostly WBTC and ETH) to the FTX exchange without explanation as it suspended withdrawals for users, sparking community outcry. crypto.

If Celsius liquidates its stETH holdings, the staking token could fall further from its fixed Ethereum price, exacerbating concerns already expressed.

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