Ethereum Developer Warns of Liquid Staking and Staking Cartel Threats

Lead Ethereum developer, Danny Ryan said that Liquid staking derivatives (LSD), much like Lido and identical protocols, can pose important risks to the Ethereum protocol and pooled capital once they exceed severe consensus thresholds. 

He highlights the risks of cartelization and emphasizes the need for self-limitation to avoid centralization and protocol risks that might perhaps potentially hurt the product.  According to him, acknowledging and addressing these inherent risks is famous to retain the steadiness and integrity of the Ethereum ecosystem.

Repost — LSDs above severe consensus thresholds pose risks to the Ethereum protocol

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— dannyryan (@dannyryan) May perchance additionally fair 31, 2023

Ryan said that it is important to acknowledge the risks posed by LSD protocols to both the Ethereum protocol and the capital allocated to them. Cartelization, abusive MEV extraction, and censorship threaten the steadiness and safety of the Ethereum network. Whereas customers and builders can answer to these threats, pooling capital correct into a cartelization-vulnerable stratum puts both the Ethereum protocol and the pooled capital at pain.

He wrote, “ETH holders, in due route, are wonderful a subset of customers, so staked ETH holders are even a subset from there. In the intense of all ETH changing into staked ETH under one LSD, governance vote weights or aborts by staked ETH attain no longer offer protection to the Ethereum platform for customers.”

To mitigate these risks, he recommends that LSD protocols, in conjunction with Lido, impose self-limitations and that capital allocators refrain from allocating more than 25% of total staked Ether to LSD protocols.

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He added that one other pain of governance deciding node operators is regulatory censorship and occupy an eye on. If pooled stake under a single LSD protocol exceeds 50%, the pooled staked capital positive aspects the flexibility to censor blocks, and even worse, at 2/3 majority, they’ll finalize such blocks. This implies that regulatory entities can demand censorship from the governance token holders, who then become a selected goal for regulations. 

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