Ethereum keeps falling, and the centralization problem of liquid pledge agreement is highlighted

If the ethereum market wasn’t already in a bad enough place, concerns about centralization in liquidity staking protocols have drawn attention, with the biggest one already unpegged.

Major liquidity staking protocols like Lido are becoming a growing concern about the amount of Ethereum staked within them.

Lido offers liquid staking, allowing users to deposit less than the 32 ETH required to run a full node on the beacon chain. It also offers an equivalent staking token (stETH) that can be used in other DeFi protocols for additional yield.

As of now, Lido has 4.2 million ETH staked, roughly a third of the total staked on the Ethereum consensus layer (formerly known as ETH 2.0).

Cartel Staking Rewards

Core ethereum developer Danny Ryan raised concerns about Lido’s dominance in staking. In a recent post, he warned that centralized attacks on the network could occur after switching to proof-of-stake if the majority of stake is too centralized.

Ryan warned that problems could arise if the liquid staking protocol exceeds key consensus thresholds such as 1/3, 1/2, and 2/3.

“Staking derivatives can be hugely profitable compared to non-pooled capital due to coordinated MEV withdrawals, block time manipulation, and/or censorship — the cartelization of blockspace.”

If that happened, he added, stakers would be discouraged from staking elsewhere “due to excessive cartel rewards.” He suggests that Lido and similar liquid staking products are “self-limiting for their own benefit,” and capital allocators acknowledge the pooling risks inherent in the protocol’s design.

Lido has received significant funding from crypto venture capital giants including Andreessen Horowitz earlier this year.

stETH decoupling

In addition to any potential "cartelization" of the staking industry, Lido currently has other issues. Its collateralized ethereum token, stETH, has been decoupled from the underlying asset after ethereum’s massive sell-off over the weekend.

ETH price is down to $1,363 at press time after falling 10% over the past 12 hours. However, stETH, which should be worth the same price, is trading at $1,294, 5% below its peg, according to data from CoinGecko.

Crypto lending platform Celsius may be the root cause, as it holds a large amount of stETH. On June 13, the platform began sending millions of dollars in crypto assets (mainly WBTC and ETH) to the FTX exchange without explanation, while suspending user withdrawals, sparking an outcry from the crypto community.

If Celsius liquidates its stETH holdings, the staked token could drift further away from its ethereum price peg, exacerbating those concerns that are already on the rise.