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stETH-ETH imbalance, Lido dominance exceeding 30% raises concerns about centralization, Vitalik: Staking chain validation share should be limited

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stETH-ETH imbalance, Lido dominance exceeding 30% raises concerns about centralization, Vitalik: Staking chain validation share should be limited

As the stETH:ETH exchange ratio further skews, leveraged positions of stETH face liquidation risks. With the largest validators on the beacon chain dominated by exchanges and lending platforms, the top staking protocol, Lido Finance, now holds over 30% of the network. Vitalik suggests limiting the share of a single validator entity through fee rates, for instance, capping it at 15%.

stETH

In a previous report, Hasu, a researcher at Paradigm and strategic advisor at Lido Finance, explained the use cases of stETH:

  • stETH: ETH2 staking certificate provided by the staking protocol Lido, allowing users to earn liquidity while staking ETH.
  • At the opening of the Beacon chain for withdrawals, stETH can be redeemed for ETH at a 1:1 ratio.
  • Current Issue 1: Users who previously used stETH as collateral are now selling due to market volatility, causing severe imbalance in the Curve pool.
  • Current Issue 2: Lido Finance dominates the validation network with over 30% share.

stETH to ETH Imbalance

As of 5/12, the stETH to ETH ratio was 1:0.98, with Lido stating that stETH is safe, but cautioning about leverage liquidation risks.

Subsequently, the Curve pool further imbalanced, with the exchange rate reaching 1:0.9758, resulting in stETH being priced 4.2% below Ether, causing liquidity skew as follows:

  • ETH: 247,588 28.89%
  • stETH: 609,359 71.11%

The selling and liquidation risks of stETH arise from leverage, for example, on the lending platform Aave, where over $2.77 billion worth of stETH is collateralized, allowing users to borrow funds below 73% of the value, but there is liquidation risk if market fluctuations lead to insufficient collateral value.

On the evening of 5/13, Lido also urged users to mitigate liquidation risks by increasing collateral and maintaining a healthy leverage ratio.

Lido Dominance in Validation Network

Ethereum Beacon chain community safety advisor superphiz.eth first raised this issue on Twitter:

I wonder, who is the first staking service provider to publicly commit to limiting their validation share to below 22%? Who do you want to see step up and prioritize the overall health of the Beacon chain over profit?

When asked why "22%", he mentioned:

The Beacon chain requires over 66% of nodes, at least four parties' participation for final validation, therefore the Beacon chain can continue network synchronization even if it loses 22% of the validation network.

Staking protocol StakeWise with a 0.59% share immediately agreed, emphasizing the importance of network health above all. In his response, superphiz subtly pointed the finger at Lido.

Vitalik: Restrictions Should Be Imposed

According to Rated, Lido's validation share has reached 30.19%, significantly deviating from other validation entities. Ethereum founder Vitalik Buterin retweeted superphiz's post, stating:

For top staking service providers, we should make the fee rates more reasonable, for example, a staking pool that controls over 15% of the validation share should accept, and even expect, that the fee rates will continue to increase until its validation share is below 15%.

Bitcoin maximalist Rob Hamilton retweeted and criticized Vitalik's idea, arguing that this move is undoubtedly an attempt to salvage the aftermath of PoS operation, a centralizing approach.

Vitalik sarcastically remarked that the Bitcoin community often relies on community marketing in many instances to address the highly centralized mining pool issue.

This once again highlights that Vitalik's April Fools' post "In Defense of Bitcoin Maximalism" was not meant to defend Bitcoin maximalists but rather to mock them.