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Last updated: June 19, 2025, 16:55 | Written by: Charlie Shrem

The world of liquid staking on Ethereum has opened up exciting possibilities for users to earn rewards while maintaining liquidity of their staked assets. Through Tenderize v2, the centralization risk is eliminated, opening doors to a liquid staking ecosystem which promotes decentralization.However, this innovative space is not without its challenges. As Lido accumulates a substantial portion of staked Ethereum, concerns have surfaced about its outsized influence on Ethereum's proof-of-stake (PoS) network. When a single staking provider captures significant market share, it introduces centralization risks, which could make the network vulnerable to governance manipulation or censorship.A growing concern revolves around centralization, with a few dominant players potentially wielding significant influence over the Ethereum network.This raises critical questions about the security, stability, and overall decentralization of the ecosystem. On staking risk, 34M of 120M circulating supply is staked, which is nearly 30% of ETH in supply. According to Buterin, the ongoing staking growth could potentially make one liquid staking token (LST) more dominant and reduce liquidity.In this article, we'll delve into the heart of these concerns, exploring the potential risks associated with centralized liquid staking solutions and highlighting promising efforts to foster a more decentralized and robust future for Ethereum. Tenderize Labs is thrilled to unveil Tenderize v2, an open-source protocol that addresses the centralization concerns surrounding liquid staking. As the decentralized finance industry experiencesWe’ll be examining solutions like Tenderize v2, championed by protocols like Swell, and discussing Vitalik Buterin’s proposed mitigation strategies. The SAL automates and simplifies the staking process, which can save time and costs associated with cross-chain transactions. The protocol allows for liquid staking tokens (SolvBTC.LST) to be used across blockchains. In contrast, traditional banking can be cumbersome, requiring manual verification and centralized data management.We will be answering common questions such as: What are the true risks of centralization in liquid staking? Introducing Tenderize v2: The Open-Source Protocol Tackling Centralization Issues in Liquid Staking, Paving the Way for a More Decentralized DeFi Ecosystem. LOS ANGELES, CA / ACCESSWIRE / Aug / Tenderize Labs is thrilled to unveil Tenderize v2, an open-source protocol that addresses the centralization concerns surrounding liquid staking. As the decentralized finance industry [ ]How can we ensure a more equitable and decentralized distribution of power? Additionally, the requirement of staking 32 ETH to become a solo validator limits participation to those with substantial resources, potentially excluding smaller investors. While Ethereum has made strides in scalability and accessibility, addressing these centralization issues is crucial for its long-term sustainability.What are the innovative solutions emerging to address these challenges?And what steps can the Ethereum community take to safeguard its decentralized ethos?Get ready to explore the complexities and nuances of this crucial topic.

The Rise of Liquid Staking and the Centralization Conundrum

Liquid staking has revolutionized how users interact with Proof-of-Stake (PoS) networks like Ethereum.Instead of locking up their ETH and foregoing its use in DeFi, users can stake their ETH through liquid staking protocols and receive a liquid staking token (LST) in return.This LST represents their staked ETH and accumulated rewards, allowing them to participate in DeFi activities while still earning staking rewards.However, the rapid growth of liquid staking has brought about unintended consequences, primarily the concentration of staked ETH within a few dominant protocols. Lido's dominance in the liquid staking derivatives market raises concerns about the degree of Ethereum's centralization. Some industry players call for addressing the potential impact of centralization on stability and functionality.This concentration is what fuels centralization concerns.

Currently, a significant portion of staked ETH is held by a handful of large providers. Ethereum co-creator Vitalik Buterin suggests measures to mitigate staking centralization, including capping stake amounts and implementing a two-tier staking model to address concerns about transaction censorship and block inclusion delays.This raises alarms because:

Governance Manipulation: A large staker can exert undue influence over governance decisions related to the Ethereum network.
Censorship Risks: A centralized entity can potentially censor transactions or blocks, compromising the network's neutrality and resilience.
Single Point of Failure: Over-reliance on a few providers creates a single point of failure, making the network vulnerable to attacks or technical issues.
Reduced Liquidity Fragmentation: If a single LST dominates the market, it can reduce liquidity and efficiency for other LSTs.

Understanding the Risks of Centralized Liquid Staking

To fully grasp the implications of centralization in liquid staking, it's crucial to understand the specific risks it poses to the Ethereum network and its users.

Erosion of Decentralization

Decentralization is a core tenet of blockchain technology, and Ethereum is no exception. In this interview, Daniel Dizon, founder of Swell, a noncustodial ETH liquid staking protocol, discusses these concerns and shares his vision for the future of liquid staking on Ethereum.When a few entities control a large portion of the staked ETH, it undermines this fundamental principle.This can lead to a loss of trust in the network and reduced participation from smaller stakers.

Increased Vulnerability to Attacks

A centralized staking provider becomes a prime target for malicious actors. Lido, the largest liquid staking service provider on Ethereum, is approaching 33% market dominance. This state of affairs has raised concerns about centralization and the protocol being a threat to Ethereum s security. At the time of writing, Lido s staking market share sits at 31.76%.If an attacker can compromise the security of a dominant provider, they could potentially gain control over a significant portion of the staked ETH and disrupt the network's operation.

Governance Capture

The concentration of voting power in the hands of a few large stakers can lead to governance capture.This means that these stakers can influence decisions in their own self-interest, potentially harming the broader Ethereum community.

Censorship and Block Inclusion Delays

Centralized staking providers can be compelled to censor certain transactions or delay the inclusion of specific blocks.This would compromise the network's neutrality and undermine its resistance to censorship.

The 34% Threshold

The dominance of any single entity in Ethereum staking exceeding roughly 34% introduces significant security concerns.At that level, a malicious or compromised entity could theoretically launch attacks on the network's consensus mechanism.This is why the Ethereum community closely monitors the staking distribution and actively seeks solutions to promote greater decentralization.

Solutions for a More Decentralized Liquid Staking Landscape

Recognizing the potential risks associated with centralization, various initiatives are underway to foster a more decentralized liquid staking ecosystem.These include:

Open-Source Protocols: Projects like Tenderize v2 are developing open-source protocols that enable anyone to participate in liquid staking without relying on centralized intermediaries.
Decentralized Governance Mechanisms: Implementing decentralized governance mechanisms that distribute decision-making power among a wider range of stakeholders.
Staking Pools and DAOs: Encouraging the formation of smaller staking pools and decentralized autonomous organizations (DAOs) that aggregate staked ETH from multiple users, reducing the concentration of power.
Validator Diversity: Promoting validator diversity by incentivizing users to stake with smaller, independent validators.
Buterin's Proposals: Exploring and implementing Vitalik Buterin's proposed measures, such as staking caps and a two-tier staking model.

Swell's Vision and the Role of Tenderize v2

Swell, founded by Daniel Dizon, is a noncustodial ETH liquid staking protocol committed to fostering a decentralized and sustainable Ethereum ecosystem.Their approach focuses on:

Non-Custodial Design: Users retain control of their ETH throughout the staking process.
Decentralized Governance: Implementing governance mechanisms that empower the community to shape the protocol's future.
Integration with Tenderize v2: Leveraging Tenderize v2 to eliminate centralization risks and create a more open and accessible liquid staking ecosystem.

Tenderize v2 is an open-source protocol designed to address the centralization concerns surrounding liquid staking.It achieves this by:

Enabling Permissionless Participation: Allowing anyone to create and manage their own liquid staking pools.
Promoting Validator Diversity: Incentivizing users to stake with a wide range of validators.
Enhancing Transparency and Auditability: Providing a transparent and auditable framework for liquid staking.

By integrating with Tenderize v2, Swell aims to create a liquid staking ecosystem that is more decentralized, resilient, and accessible to all users. This overview aims to, in a digestible manner, critically analyze the centralization issues that have emerged within Ethereum, particularly post its transition to Proof of Stake (PoS), andThis aligns with the broader goal of preserving Ethereum's decentralized ethos.

Buterin's Stance on Centralization and Proposed Mitigation Strategies

Vitalik Buterin, co-creator of Ethereum, has been vocal about the potential risks of staking centralization. 1,219 followers 10mo Report this postHe has proposed several measures to mitigate these risks, including:

Staking Caps: Limiting the amount of ETH that a single entity can stake.
Two-Tier Staking Model: Implementing a two-tier staking model that separates responsibilities and reduces the concentration of power.

Two-Tier Staking Model

Buterin has proposed a two-tier staking model to improve decentralization and tackle concerns about transaction censorship and block inclusion delays.The model envisions two classes of stakers:

Tier 1: Smaller, individual stakers who focus on block proposal and attestation.Their primary role is to ensure that blocks are valid.
Tier 2: Larger, institutional stakers that focus on longer-term governance and network security.They would have greater responsibility in determining network policies and validating the actions of Tier 1 stakers.

This division helps decentralize power, makes it harder for a single entity to exert undue influence, and potentially addresses concerns about censorship and collusion.The smaller stakers could act as a check on the larger stakers, ensuring that network policies remain aligned with the community’s values.

Staking Amount Caps

Introducing a cap on the amount of ETH any single entity can stake is another mechanism to prevent centralization.By limiting how much any one entity can control, it distributes power more evenly across the network.This measure aims to reduce the risk of governance manipulation and censorship by preventing a single, dominant entity from controlling a disproportionate share of the staking rewards and governance rights.

The effectiveness of these strategies relies on community consensus and active participation.The aim is to balance the benefits of liquid staking with the imperative to maintain a decentralized and robust Ethereum network.

Hyperliquid's Case: Centralization Concerns Beyond Staking

While our focus is on liquid staking, it's important to acknowledge that centralization concerns extend beyond this specific area of the DeFi landscape. Hyperliquid's Ascent: Fee Dominance, Market Cap, and Centralization Concerns Examined The emergence of Hyperliquid in the decentralized perpetual futures market has been nothing short of spectacular, sending ripples of both excitement and apprehension throughout the crypto sphere.For example, the rise of Hyperliquid in the decentralized perpetual futures market has also raised questions about centralization.Although Hyperliquid has achieved remarkable success in terms of fees and market capitalization, its centralized nature raises concerns about its potential impact on the broader DeFi ecosystem.This underscores the need for vigilance and ongoing efforts to promote decentralization across all aspects of DeFi.

Practical Steps Users Can Take to Support Decentralization

Beyond the efforts of protocols like Swell and initiatives like Tenderize v2, individual users can play a crucial role in promoting decentralization in liquid staking.Here are some actionable steps you can take:

Choose Decentralized Solutions: Opt for liquid staking protocols that prioritize decentralization and have robust governance mechanisms.
Stake with Independent Validators: Support smaller, independent validators rather than consolidating your stake with a few large providers.
Participate in Governance: Actively participate in governance discussions and vote on proposals that promote decentralization.
Educate Yourself: Stay informed about the latest developments in the liquid staking space and the risks associated with centralization.
Diversify Your Staking: Don't put all your eggs in one basket.Diversify your staked ETH across multiple protocols and validators.

Addressing Common Questions About Liquid Staking Centralization

Let's address some frequently asked questions about liquid staking centralization:

What is liquid staking, and why is it important?

Liquid staking allows users to stake their ETH and receive a liquid staking token (LST) in return, enabling them to earn rewards while maintaining liquidity.It's important because it promotes greater participation in staking and unlocks the potential for new DeFi applications.

What are the main risks of centralization in liquid staking?

The main risks include governance manipulation, censorship, increased vulnerability to attacks, and reduced liquidity fragmentation.

How can we measure the degree of centralization in liquid staking?

Key metrics include the market share of the largest liquid staking providers, the concentration of staked ETH among validators, and the degree of decentralization in governance mechanisms.

What are some promising solutions for addressing centralization concerns?

Promising solutions include open-source protocols, decentralized governance mechanisms, staking pools and DAOs, validator diversity, and Buterin's proposed measures.

How can individual users contribute to a more decentralized liquid staking ecosystem?

Users can choose decentralized solutions, stake with independent validators, participate in governance, educate themselves, and diversify their staking.

The Future of Liquid Staking: A Decentralized Vision

The future of liquid staking hinges on addressing the centralization concerns that currently threaten the ecosystem.By embracing open-source protocols, promoting validator diversity, and empowering users through decentralized governance, we can build a more resilient, secure, and equitable liquid staking landscape.Protocols like Swell, with their commitment to decentralization and integration with initiatives like Tenderize v2, are paving the way for this future.The Ethereum community must remain vigilant, actively participate in governance, and support solutions that prioritize decentralization to ensure the long-term success and sustainability of the network.

Conclusion: Key Takeaways and Call to Action

Centralization in liquid staking presents a significant challenge to the decentralized ethos of Ethereum.However, the Ethereum community is actively working to address these concerns through innovative solutions and collaborative efforts.By understanding the risks, embracing decentralized alternatives, and actively participating in governance, we can collectively shape a more decentralized and sustainable future for liquid staking.Remember, the future of Ethereum depends on our collective commitment to preserving its decentralized nature.

Key Takeaways:

Centralization in liquid staking poses risks to Ethereum's security and governance.
Open-source protocols like Tenderize v2 offer promising solutions for decentralization.
Validator diversity is crucial for a resilient liquid staking ecosystem.
Individual users can play a vital role in promoting decentralization.

Call to Action: Explore decentralized liquid staking options, support independent validators, and participate in Ethereum governance.Let's work together to build a more decentralized and sustainable future for Ethereum!