If the Ethereum markets were not already in a bad shape, centralization concerns have been raised regarding the liquid staking protocol, which already has one of the largest.
Major liquid staking protocols such as Lido are becoming a growing concern regarding the amount of Ethereum that is at stake in them.
Lido offers liquid staking that allows users to deposit less than the 32 ETH required to run a full node on the Beacon chain. It also offers a Uniform Staking Token (stETH) that can be used in other DeFi protocols for additional yields.
At the time of writing, Lido held 4.2 million ETH stakes which is roughly a third of the entire amount on the Ethereum consensus layer (formerly known as ETH 2.0).
Cartel Staking Rewards
Core Ethereum developer Danny Ryan has raised concerns about Lido’s dominance at stake. He warned in a recent article that switching to Proof-of-Stake could lead to a centralized attack on the network if the majority of stake power is too concentrated.
Ryan warned that problems could ensue if a liquid staking protocol exceeds critical consensus thresholds such as 1/3, 1/2, and 2/3.
“Staking derivatives may gain outsized compared to non-pooled capital due to coordinated MEV extraction, block-timing manipulation, and/or censorship – the cartelization of block space.”
If this happens, bettors are discouraged from placing bets elsewhere “because of the larger cartel prizes”. He recommended that Lido and similar liquid staking products “self-limit for their own sake,” and that capital allocators accept the pooling risks inherent in protocol designs.
Lido remains somewhat centralized after receiving major funding from crypto venture capital giants including Andreessen Horowitz earlier this year.
Depegging stETH
Lido has other problems at the moment, aside from any potential “cartelization” of the staking industry. After Ethereum’s massive weekend sell-off, its bets have split from the underlying asset of the Ethereum token, stETH.
At press time, the price of ETH has dropped to $1,363 after a 10% drop in the past 12 hours. However, according to CoinGecko, stETH, which should be priced the same, was trading 5% below its peg at $1,294.
Crypto lending platform Celsius may be the root cause of this as it holds the bulk of stETH. On 13 June the platform began sending millions of dollars in crypto assets (mainly WBTC and ETH) to the FTX exchange without any explanation, while it suspended withdrawals to users who shouted from the crypto community.
If Celsius liquidates its stETH holdings, the staking token could fall further from its Ethereum price peg adding to the concerns already circulated.