Ethereum Liquid Staking Protocols Spark Centralization, Depegging Concerns

If Ethereum markets were not in a bad enough place already, centralization concerns have been raised regarding liquid staking protocols with the largest one already depegging.

Major liquid staking protocols such as Lido are becoming a growing concern over the amount of Ethereum that is staked in them.

Lido offers liquid staking which allows users to deposit less than the 32 ETH required to run a full node on the Beacon Chain. It also supplies an equivalent staking token (stETH) that can be used in other DeFi protocols for additional yields.

At the time of writing, Lido had 4.2 million ETH staked which is about a third of the entire amount staked 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 in staking. A centralized attack on the network could happen after the switch to proof-of-stake if the majority of staking power is too concentrated, he warned in a recent article.

Ryan warned that problems could occur if a liquid staking protocol exceeds critical consensus thresholds such as 1/3, 1/2, and 2/3.

“The staking derivative can achieve outsized profits compared to non-pooled capital due to coordinated MEV extraction, block-timing manipulation, and/or censorship – the cartelization of block space.”

If this occurs, stakers become discouraged from staking elsewhere “due to outsized cartel rewards,” he added. He recommended that Lido and similar liquid staking products “self-limit for their own sake,” and capital allocators acknowledge the pooling risks inherent to protocol designs.

Lido is somewhat centralized already having received major funding earlier this year from crypto venture capital giants including Andreessen Horowitz.

Depegging stETH

Lido has other problems at the moment aside from any potential “cartelization” of the staking industry. Its staking Ethereum token, stETH has depegged from the underlying asset following Ethereum’s massive weekend selloff.

ETH prices had tanked to $1,363 at the time of press, following a 10% loss over the past 12 hours. However, stETH which should be the same price was trading at $1,294, 5% below its peg according to CoinGecko.

Crypto lending platform Celsius could be the root cause since it holds a large stash of stETH. On June 13 the platform began sending millions of dollars in crypto assets (primarily WBTC and ETH) to the FTX exchange without explanation while it suspended withdrawals for users sparking an outcry from the crypto community.

If Celsius liquidates its stETH holdings, the staking token could fall further from its Ethereum price peg exacerbating those already aired concerns.

The post Ethereum Liquid Staking Protocols Spark Centralization, Depegging Concerns appeared first on BeInCrypto.

Earning Passive Income With Crypto

Related Posts

400+ Crypto Advertisements Violate Guidelines in India — ‘Some Influencers Talk About Crypto Without Understanding It’

The Advertising Standards Council of India (ASCI) has reportedly revealed that more than 400 crypto ads violated its guidelines so far this year. The majority of complaints…

Investment: How To Calculate The Attractiveness of a Cryptocurrency

Investment: Asset manager, financier, and cryptocurrency teacher Alexander Alexandrovich Ryabinin says the investment attractiveness of digital assets can be determined by analyzing inflationary and deflationary processes. The…

Rich Dad Poor Dad’s Robert Kiyosaki Says He’s Waiting for Bitcoin to Test $1,100 to Buy More

The famous author of the best-selling book Rich Dad Poor Dad, Robert Kiyosaki, says he’s waiting for the price of bitcoin to test $1,100. He added that…

This is the Future of the Liquid Staking, Based on the Past

Staking and the future: The liquid staking industry is at a turning point, says Simon Furlong, the Co-Founder of Geode Finance. The various opportunities across DeFi and cryptocurrency…

Book by Nigerian Author Reminds New Adopters Why Bitcoin Was Created

Nigerian author and crypto advocate Nathaniel Luz has said his recently published book represents his attempt to remind people of the initial reason why bitcoin was created….

Voyager Digital Issued Notice of 3AC’s Loan Default; Here’s What Might Be Next

Crypto hedge fund Three Arrows Capital (3AC) has defaulted on an estimated loan of $670 million, as per the market update by Voyager Digital. In a release dated June…