Rapture #211: ETH Liquid Staking Update Part 1

Rapture #211: ETH Liquid Staking Update Part 1

Ever since I started to work for SSV, I have been enmeshed in the world of Etheruem staking. I have to say, this area of crypto is super interesting and not well covered yet at all.

From operators to infrastructure to pools to innovative financial productization, there is a TON going on in the world of Ethereum staking. If you want to learn more on your own, I highly recommend joining the ETHStakers community and following people like Danny Ryan, SuperPhiz, and Butta.eth on Twitter.  

Ethereum staking is yuugggeee

The Ethereum staking industry is already quite large in terms of players, as there needs to be a robust tech stack to support the 13,372,088 ETH (approximately $24 billion) currently staked. Furthermore, this industry is primed for growth, as I expect the $24 billion worth of staked ETH only to dramatically increase as we get past the risks of the merge and enter a period where staked ETH becomes unlockable.

Until ETH becomes unlockable, liquid staking providers for ETH will continue to dominate. Currently, first mover Lido has had a stranglehold on ETH liquid staking with more than $7.2 billion worth of stETH having issued by them. Yet there has been a rising cacophony of critics regarding Lido's dominance, and multiple new liquid staking products are coming to market that aim to takeaway some of that market share.

Let's dive into some liquid staking updates. This will be a series of posts.

Criticisms of Lido

Over the past few months, many industry leaders voiced their s over the centralization risks Lido has been introducing into the Ethereum ecosystem. Leading Ethereum researchers, such as Danny Ryan, and community leaders, such as Superphiz, have pointed out issues with the leading staking player. Danny has stated that Lido is now hovering around controlling 1/3 of the total amount of validators on Ethereum and its market share in terms of validator control is rapidly growing. While 1/3 poses a centralization risk, the far bigger worry people have is if any single liquid staking solution controls 50%+ of the validators.

If that were to happen, the entity controlling the solution (in the case of Lido, LDO governance holders) would have the ability to censor blocks, and at 2/3 control that entity would be able to finalize the censored blocks.

Even Vitalik has subtweeted about this issue, suggesting that, when a staking pool reaches >15% control of all validators, that pool should increase their commissions until they fall back below the 15% mark.

In response to these criticisms, Lido opted to create a discussion on their governance forum where they ask their community if they should limit Lido's market share to being a fixed percentage of staked ETH. We will see if anything comes from it.

While these criticisms have really reached a boiling point in the past week, I do not think they will go anywhere, especially if Lido's market share continues to grow and the bear market amplifies people's negative emotions.


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