Opposing Centralization in Ethereum Staking

The market has agreed that staking is a really good deal — more so than core developers ever anticipated. There’s not just demand to build on Ethereum, but a wildly unanticipated demand to participate in Ethereum’s consensus, aka staking.

Stakers put down collateral in the form of ETH to validate the network and receive rewards in the form of ETH. Yield is dependent on the size of the validator set, which, in theory, creates a market equilibrium — if yield is too low, people unstake. If the validator set is too small, yield increases and new stakers are incentivized to enter the set.

This article is part of CoinDesk’s “Staking Week.” Justin Kalland is the vice president of innovation at Horizen Labs Ventures.

In the purest form of staking, affectionately called “home staking,”you run a small, unobtrusive, energy-efficient PC with Ethereum software and you control your assets. But there are two cohorts who want to stake but don’t want to “home stake.” The first set is people who don’t have the motivation, time or tech savvy to learn how to set up the necessary PC. The second set is people who don’t want to lock up their ETH for a ~3%-6% yield – they’re interested in more risk and more reward.

These two cohorts have given rise to a part of the ecosystem that is both a boon and a bane. They allow their stake to be managed by a third party who gives them receipt tokens, which means that this third party doesn’t have anything “at stake” but still retains some influence over the network. It provides a service and takes a cut of the rewards.

On the one hand, third parties democratize access to staking. The barrier to stake is quite high in terms of initial investment and tech knowledge, and “staking-as-a-service” providers make on-boarding easy. They are are a net positive for the chain.

On the other hand, third parties, or in other words middlemen, the types of market participants that crypto is meant to eliminate, come with problems.

Ethereum’s Shanghai hardfork in April enabled people who had been staking for years to finally withdraw. It was a massive derisking event for those interested in staking. Since then, the queue to get into staking has been several weeks to months long. The metaphorical bouncer has not had a moment’s rest.

Everybody is piling into staking and few are leaving, putting network stability and centralization risks at the forefront of the minds working in core development.

The boom in staking coupled with centralization issues of third-party providers has created somewhat of a villain narrative in the staking ecosystem. And one third-party staking provider has eclipsed all others: Lido. Lido is a semi-decentralized, non-custodial staking protocol that anybody can use to stake their ETH that is governed by a decentralized autonomous organization (DAO).

There are two sides to the debate — Lido is a successful business with attractive UX [user experience] and solid business development. It’s acting as an economically rational actor by seeking to control a large portion of all staked ETH and is stress-testing the limits of Ethereum’s protocol design. Plus, it’s not just one entity, it’s 38 operators.

See also: Does Lido Control Too Much Liquid Staking?

The other side would say that Lido is detrimental to the decentralization of the chain, because it refuses to artificially cap its staking dominance and that its rapid monopolistic growth is uncooperative with researchers while they figure out a “coded in” way to deal with the design flaw that has allowed a single entity to grow to manage one-third of all staked ETH. Further, those 38 operators are still managed by one entity: the Lido DAO, where decisions are usually made by just two wallets.

Lido is exploiting a flaw that threatens the core value proposition of Ethereum: its decentralization and inability to bend to any special interests.

In any case, the move here is to give Ethereum researchers more time to discuss, brainstorm and adapt the system to account for these economically rational actors. Core development and research are accomplished in uncharted territory with hundreds of the best minds in tech who now grapple with this centralization risk and how to mitigate or even actively account for it.

There are already ideas being discussed and the community is working hard to inform individuals and institutions of risks that might not be apparent when they choose their staking provider. I, for one, expect that the caliber of solution we’ll see will match that which we’ve come to know from Ethereum core development.

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