A leading Ethereum developer has warned of some of the risks that liquid staking derivatives will pose to the Ethereum ecosystem.
On June 1, Ethereum developer Danny Ryan published an article about liquid staking derivatives (LSD). Ryan noted that these “critical consensus thresholds” pose a risk to the Ethereum protocol.
This developer commented:
With withdrawals activated, it’s time to restructure.
ARE LIQUID STAKING FOUNDATIONS A DANGER TO ETHEREUM?
Liquid staking derivatives are protocols like Lido that provide flexible ETH staking capabilities. However, their “decentralized” governance is worrisome and can lead to centralization.
Ryan stated that LSD protocols would encourage a form of restrictive agreement (Cartel), posing a significant risk to the Ethereum protocol. In economics, an anti-competitive agreement (Cartel) is seen as the unification of actions by many businesses to reduce or eliminate competitive pressure or limit the ability to act independently among other businesses. competitors. The expert added that investors allocating capital to these protocols should be aware of the risks involved.
LSD protocols should set their own limits to avoid the risk of centralization which could eventually destroy their product.
In an extreme scenario, consensus can be exceeded when the staking derivative achieves a return that exceeds the capital that is not in the pool. This could happen if MEVs (Miner Extractable Value) co-ordinated attacks, manipulating block time and/or censorship, the expert said.
And in this scenario, users will no longer want to staking elsewhere due to the large Cartel rewards. This leads to auto-increasing Cartel holdings for staking.
Furthermore, deciding who can become a node operator is another avenue to incentivize the Cartel.
In the case of Lido, the LDO governance token could be the deciding factor and this could potentially threaten Ethereum. The reason is because whales and venture capitalists often manipulate DeFi governance.
Ryan notes:
Thus, the governance token that determines node operators can become a self-reinforcing Cartel and abuse the Ethereum protocol.
The expert concludes with a recommendation that Lido and similar LSD products should set limits for their own good and that stakers should also set limits.
Capital allocators should not invest in LSD protocols in excess of 25% of all Ether staking due to the inherent and extreme risks involved.
On May 22, Ethereum co-founder Vitalik Buterin warned of the danger of “overloading” Ethereum’s consensus beyond its core functions. Buterin commented:
Instead, we should maintain the minimalism of the chain, supporting re-staking use cases to expand the role of the Ethereum consensus without letting the worst-case scenario play out.
STAKING ETH STATUS UPDATE
According to Nansen data, 21.7 million ETH is currently staking. However, Beaconcha.in reports a much lower figure of 19.1 million.
Lido holds the majority of these market shares. That’s why this platform is the biggest threat. Lido currently has 6.95 million ETH staking on the platform, worth $12.6 billion. This is equivalent to about a third of all Ethereum staking.
According to Nansen data, withdrawals have slowed and now deposits are outstripping withdrawals.