Ethereum staking issues
Last updated
Last updated
Switching Ethereum to Proof of Stake (POS) has brought many benefits for the chain and users. Unfortunately, the current state of Ethereum staking poses several fundamental problems some of which can become existential threats to the network.
They are:
Centralization of staking
Geo distribution and risk of local regulations
Custody of the private keys and losses related to this
Centralization of staking
At the moment of writing, over 30% of all staked ETH is staked with a single organization (Lido), and looking at only ETH liquid staking segment that amounts to close to 75%. While we deeply respect the Lido project - the pioneers of ETH2 staking, this still represents a risk to the chain and a potential "chokepoint". Also, there are several centralized companies in the top stakers of ETH - Coinbase, Kraken, Binance, and so on. While the intentions of all these companies are likely well-meaning, they can be persuaded by regulators and governments to perform actions that can damage Ethereum. And the recent example of Kraken made by SEC to stop their staking program (and pay $30M fine) is a good and timely illustration of that. ()
Ethereum network and economy need more decentralized options for staking.
Geo distribution and risk of local regulations
Over 42% of ETH2 validators are located in a single country (USA), with the next country having around 7% (Germany). Even without taking into consideration the current negative regulatory oversight in the USA, it is risky for the Ethereum network to have such a concentration in one country.
In the past 30 days, 50%+ of Ethereum validators censored transactions. While there might be sound legal reasons for doing this, but censorship goes against the open and permissionless nature of Ethereum and web3 overall.
We need more geographically dispersed and permissionless Ethereum validators to minimize the impact of censorship.
Custody of the private keys and losses related to this
Thankfully, this is a rare occasion, more often than that your fav centralized exchange loses all your coins (staked and unstaked) (FTX - looking at you) or centralized and glorified farming vault (Celsius, Voyager Digital). It proves (once again) - DeFi's mantra: do not trust - verify.
We need more decentralized ways of creating and storing private keys, ideally that they are cryptographically safe but not a single person saw the whole private key.
So what does Stakestar have to do with these three major problems of Ethereum staking?
Imagine you staked your precious ETH with a centralized company that stores the validators' private keys internally and is supposed to have proper security and backup procedures for this, and then they accidentally lost the keys. It did happen to StakeHound who lost (or their vendor lost) keys for 38,178 staked ETH (63m USD as of today). ()
