The next big leap for Ethereum liquid staking: The staking landscape

Imagine a world where everyone, regardless of their background, can easily access and participate in the revolutionary world of Ethereum. A world where decentralized applications empower individuals, and the potential for innovation knows no bounds. Against a highly equivocal and chaotic macroeconomic landscape, this is the world that the prophets of Ethereum dream of.

But little do they know this world is like an unrealized dream. Why? Let’s dig deeper.

Reflecting on the Ethereum liquid staking landscape

Centralized liquid staking protocols are at the forefront of the liquid staking revolution on Ethereum, and it shouldn’t come as a surprise. Why? Because they are highly scalable — thanks to the centralized validator set that they have. The biggest liquid staking protocol on Ethereum currently has a limited node operator set of 29 operators. It must then be a no-brainer that they hold a hegemony over the network. Any protocol claiming to be decentralized but running its operations as a business is also able to offer much higher standards of composability. While this composability that is offered to users is a feature, it can be counter-productive as well — primarily because of the systemic risks this can cause.

On the flip side, decentralized protocols do exist, but they are highly unscalable. And thus, they have a fraction of ETH staked in them compared to what is often staked via the centralized ones.

While decentralized protocols have attempted to reduce the minimum capital required to run a validator node from 32 to 8 ETH, that is still a sizeable amount for the wider ecosystem. Admittedly, this does open up opportunities for a wide number of stakers to start staking on the network, however, we contend that 8 ETH is still a sizeable amount. This reintroduces the problem of scalability, and thus a significant portion of ETH gets staked through a select group of professional node operators. This leads to the further concentration of staked ETH. The presence of these centralized node operators across different liquid staking protocols undermines the censorship resistance of the underlying network.

The inflow of ETH post-Shapella is a good indicator of users’ liquid staking preferences. One would hope that a lot of the incoming ETH would go to decentralized liquid staking; however, the figures state otherwise.

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Making Ethereum liquid staking scalable

One of the biggest challenges for the existing liquid staking protocols today is that they are tuned for either scalability alone or decentralization alone. The ones that are tuned for scalability alone are not decentralized, and the ones that are tuned for decentralization are not scalable. There are several examples of this — from protocols having a concentrated node operator set to those having high minimum capital requirements to run validator nodes for Ethereum.

While there have been attempts by these protocols to move towards either making their architectures scalable or decentralized, making that is quite difficult given the huge amounts of ETH that are already staked via them. Moreover, these protocol-level changes require a lot of internal deliberations (at-least for decentralized protocols) before they are rolled out.

Moreover, a core objective of any business is to make sure that they hold the hegemony over the industry to persistently retain that. This is reflected by the feigned attempts at a willingness to decentralize — but then having them falling on their head. Perhaps, there is no reason why this would happen. A centralized liquid staking protocol often operates as a business whose core objective is to compromise decentralization to achieve profitability. While I do not condemn the latter, I do feel that it comes — almost always — at the cost of decentralization.

What Ethereum needs

Ethereum prophets often call for the need to diversify staking across a multitude of protocols. And perhaps, it wouldn’t be remiss to credit those protocols that have emerged that are attempting to realize that vision. However, I must provide a caveat that any emerging protocols need strategic and critical analysis. No one would want shabby architecture being polished and presented as a resilient solution and risking the stability of Ethereum. I believe that there are two things that need immediate attention to drive growth to Ethereum liquid staking:

  • Reducing the minimum capital requirements to run a validator node: This is perhaps easier stated than executed. Reducing the minimum capital requirements incentivizes a wider spectrum of users to participate in network validation.
  • Building censorship resistance: This is perhaps common knowledge, but it often gets overlooked. With the pace at which the macroeconomic landscape is evolving, it is a dire need for protocols to integrate solutions that build the censorship resilience of the protocol. This is akin to hedging against potential future slowdowns in validator architecture and building a high-performant architecture that keeps the network secure.

Admittedly, I find myself at crossroads while writing these solutions because, while I assert that being aware of the existing challenges as well as the solutions is of paramount importance, it is not enough to persistently echo them. It is essential that we engage in extensive research and relentlessly test and build solutions that help solve these challenges and build a resilient architecture.

Mohak is the founder of ClayStack. He is an entrepreneur, investor, and a leader in the staking and liquid staking space.

Mohak is the founder of ClayStack. He is an entrepreneur, investor, and a leader in the staking and liquid staking space.

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