How Ethereum's staking revolution is brewing

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How Ethereum's staking revolution is brewing

Stakers used ETH to verify the network and receive rewards in the form of ETH. In theory, the value of the validator set is determined by the size of the Validator set, which in theory creates a market equilibrium - if yield is too low, people unstake. If the valuer set is too small, new stakers are encouraged to join the set if it's too small.

With the purest form of staking, i.e. 'home staking', you run a small, unobtrusive, energy-efficient PC with Ethereum software and you control your assets. In addition, there are two cohorts who want to 'own' the land, but don't want to'ship' it. The first set of people are those who lack the motivation, time or tech savvy to learn how to set up the necessary PC. The second set is those who don't want to lock up their ETH for a 3%-6% yield - they're interested in more risk and more rewards.

A part of the ecosystem that is a boon and a bane, these two cohorts have blossomed into an ecosystem that is both a boon and a bane. They allow their stakes to be managed by a third party who gives them receipt tokens, which means that this third party doesn't have anything 'at stake' but still retains some influence over the network. It provides a service and takes a cut of the rewards.

In April, Ethereum's Shanghai hardfork allowed people who had been staking for years to finally withdraw. Derisking was a must-attend event for those interested in staking. Since then, the queue to get into staking has been several weeks to months long. A villain narrative is emerging in staking, with the boom in staking and the centralization of third-party providers creating a rival narrative. And one third-party staking provider has eclipsed all others: Lido. Lido is a semi-decentralized, non-custodial staking protocol that anybody can use to stake their ETH, which is governed by a decentralized autonomous organization.

Lido is a successful business with attractive UX (user experience) and solid business development. He is acting as a economically rational actor by seeking to control a large portion of all ETH, and is stress-testing the limits of Ethereum's protocol design. Plus, it's not just one entity, it's 38 operators.

The other side would contend that Lido is harmful to the decentralization of the chain because it does not artificially limit its staking dominance and that its rapid monopolistic growth is uncooperative with researchers while they figure out a 'coded in' way to deal with the design flaw that has allowed a single entity to grow to manage one-third of all ETH. In addition, those 38 operators are still managed by one entity: the Lido DAO, where decisions are usually made by only two wallets.

In any case, the move is to give Ethereum researchers more time to discuss, brainstorm and adapt the system to account for these economically rational actors. With hundreds of the best minds in tech, core development and research are carried out in uncharted territory, with hundreds of the best minds in tech grappling with this centralization risk and how to mitigate or actively account for it.

There are already ideas being discussed and the community is working hard to warn individuals and institutions of risks that may not be evident when they choose their staking provider. I, for one, expect that the caliber of solution we'll see will match that which we've come to know from Ethereum core development.