How liquid staking can potentially harm the Ethereum ecosystem: HashKey report

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Because it continues to develop, liquid staking brings appreciable dangers to the house and wishes higher decentralization, in line with a report printed by digital asset agency HashKey Capital.

In accordance with the report, the general liquid staking derivatives (LSD) market has surged to greater than $22 billion in complete worth locked in 2023. As well as, the market capitalization of LSD tasks has reached $18 billion.

Overview of the liquid staking derivatives market in 2023. Supply: HaskKey Capital

Whereas the expansion of LSD protocols could also be good for his or her respective communities and stakeholders, it additionally might be a double-edged sword. In accordance with the report, it may hurt the Ethereum ecosystem in numerous methods.

Because the desk above reveals, many LSD protocols depend on a small variety of node operators that centralize numerous validator nodes. In accordance with the report, the variety of node operators must be a “level of concern for centralization.”

The report notes that centralization in liquid staking can have a number of dangerous results on the ecosystem, comparable to diminished competitors and elevated danger of censorship. In accordance with the report:

“There’s a heightened chance of censorship with centralized staking gamers, as they might be topic to incentives or regulatory strain to censor transactions. This could doubtlessly end in a disruption of the belief throughout the community.”

As well as, because it will get additional centralized, there are dangers of decreased safety, as large staking gamers could make it simpler for attackers to hold out 51% assaults. Furthermore, there’s additionally an elevated danger of collusion.

“Centralized stakers can collude to hold out actions that go towards the decentralization ethos and towards the customers, comparable to malevolent MEV extraction and frontrunning,” the report reads.

Whereas there are centralization dangers, HashKey additionally acknowledges that almost all protocols are very current and have made plans to decentralize and add distributed validator expertise to their protocols for higher decentralization and resiliency.

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