April 19, 2024
Altcoins News

Ethereum Liquid Staking Providers Navigate Decentralization: The 22% Self-Limit Proposal

At least five providers of Ethereum liquid staking services have either implemented or are actively working towards implementing a self-imposed rule, assuring that they will not control more than 22% of the Ethereum staking market. This move is viewed as a step to maintain decentralization within the Ethereum network. Notably, among the Ethereum staking providers that have already committed to this self-limit or are in the process of doing so are Rocket Pool, StakeWise, Stader Labs, and Diva Staking, as reported by Superphiz, a prominent Ethereum core developer. Puffer Finance, another liquid staking service, has also announced its commitment to this self-imposed limitation.

The rationale behind this proposal is to address concerns regarding the increasing centralization of Ethereum staking. Superphiz explained that the 22% limit was chosen because, in Ethereum, consensus among 66% of validators is necessary to determine the state of the network. By setting the limit below 22%, it ensures that at least four major entities would need to collude in order to manipulate the chain’s finalization. Finalization refers to the point at which transactions on the blockchain become immutable, ensuring that transactions within a block cannot be altered.

This idea was initially put forward by Superphiz in May 2022 when he questioned whether a staking pool would prioritize the health of the Ethereum network over its own profits. Interestingly, the largest Ethereum liquid staking provider, Lido Finance, voted overwhelmingly against self-imposing such limits in June, with a majority of 99.81%. Superphiz expressed concerns about Lido’s intentions, suggesting that they intend to control the majority of validators on Ethereum’s beacon chain.

Currently, Lido Finance dominates the Ethereum staking market, with a share of 32.4% of all staked Ether, while the next largest entity, Coinbase, holds only 8.7% of the market, according to data from Dune Analytics.

One industry expert, “Mippo,” asserted on August 31st that the self-limitation proposal is unrelated to the principle of “Ethereum alignment,” which is understood to promote credible neutrality and permissionless innovation on the Ethereum platform. Mippo argued that those advocating for the proposal would not do so if they were in Lido’s position, emphasizing that participants in the Ethereum community should refrain from shaming more user-friendly solutions as greedy products.

However, others expressed more significant concerns about potential centralization issues, characterizing Lido’s dominant market share as “disgusting and selfish.”

Photo by Bastian Riccardi

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