How liquid staking can doubtlessly hurt the Ethereum ecosystem: HashKey report

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

Based on 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 initiatives has reached $18 billion.

Whereas the expansion of LSD protocols could also be good for his or her respective communities and tokenholders, it additionally might be a double-edged sword. Based on the report, it may hurt the Ethereum ecosystem in varied methods.

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

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The report notes that centralization in liquid staking can have a number of dangerous results on the ecosystem, resembling diminished competitors and elevated threat of censorship. Based on the report:

“There’s a heightened chance of censorship with centralized staking gamers, as they might be topic to incentives or regulatory stress 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 massive staking gamers could make it simpler for attackers to hold out 51% assaults. Furthermore, there’s additionally an elevated threat of collusion.

“Centralized stakers can collude to hold out actions that go in opposition to the decentralization ethos and in opposition to the customers, resembling 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 know-how to their protocols for higher decentralization and resiliency.

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