Barriers To Entry In Liquid Staking 1.0
To service demand for liquid staking, without centralizing the underlying validator set, a totally permissionless liquid staking protocol must exist. Such a system allows more validators to participate in the liquid staking ecosystem, re-decentralizing the underlying crypto network. The question at hand is, why aren’t more validators and solo-stakers using the liquid staking protocols of today?
Validator Whitelists: Popular protocols today only work with select validator sets, requiring new validators to go through a rigorous interview process. This results in massive stake being managed by a cartel of selected validators.
Lido controls 32% of all staked ETH and 20% of all ETH.
Socialized Risk: Companies running validator businesses have to control risk. When LST protocols use a shared token, the yield of that token depends on the group of validators. If one of the many validators is slashed, all users are punished.
Rocketpool requires users to stake RPL to protect end users from this risk.
Expensive, Fragmented, On-Chain Liquidity: Projects have successfully launched new liquid staked tokens in the past, such as cbETH and stETH. The liquidity of these assets often runs thin due to the value of incentive tokens decreasing, especially in bear markets. The thin liquidity causes problems during the borrowing and lending process. For example, the lack of liquidity funding for cbETH almost left Aave holding bad debt.
Lido has to pay 1,000,000 LDO ($3m) every month to incentivize liquidity and protect the price parity peg for their products.
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