This report discusses the future implications of Ethereum staking, focusing on the potential risks associated with centralization and the growing number of validators. It highlights the dominance of Lido as a staking provider and the potential security risks this poses. The report also explores the possible scenarios if the demand for staking continues to rise, including the strain on the peer-to-peer network and the shift to an “untested economic regime”.
Ethereum Staking and Centralization Risks
- Staking Dominance: Approximately 22% of the current Ethereum supply is being staked, with Lido controlling the largest market share at around 32%. This dominance raises concerns about centralization risks.
- Security Implications: If Lido were to control over 33% of all staked Ethereum, it could potentially prevent the blockchain from finalizing, posing a significant threat to the network’s security.
- Response from Lido: Despite these concerns, there has been little response from Lido regarding plans to mitigate these risks, with some staff members even dismissing them.
Increasing Number of Validators and Network Strain
- Growing Validator Numbers: The increasing number of validators is causing strain on the peer-to-peer network, potentially requiring node operators to upgrade their hardware to accommodate the increase in message propagation.
- Untested Economic Regime: If the staking queue remains full and higher levels of Ethereum are staked, the market cap of staked Ethereum could surpass that of unstaked Ethereum, leading to an untested economic regime.
- Yield Considerations: As the number of validators grows and yields decrease, validators may begin to exit, especially if the opportunity cost of tying up capital for yields under 2% is not worth it.
Potential Solutions and Future Scenarios
- Short-Term Solution: A proposed short-term solution is EIP-7514, which would modify the validator churn limit to a hard-capped maximum, slowing down the growth of active validators.
- Long-Term Solutions: Potential long-term solutions include increasing validator maximum effective balance, reducing issuance rewards, and lowering the barrier for entry for liquid staking providers.
- Future Scenarios: It is unlikely that the queue will remain full, and it is expected that the percentage of Ethereum staked will not exceed 40-45% of the total supply.
- Monitor Staking Trends: Keep a close eye on the trends in Ethereum staking, particularly the dominance of certain providers like Lido and the potential security risks this poses.
- Consider Hardware Upgrades: If the number of validators continues to increase, node operators may need to consider upgrading their hardware to accommodate the increased message propagation.
- Stay Informed on Proposed Solutions: Stay updated on proposed solutions to these issues, such as EIP-7514 and other potential long-term solutions.