How Liquid Staking Could Impact the Ethereum Ecosystem: A HashKey Report

Liquid Staking Derivatives Market Surges to $22 Billion

The liquid staking derivatives (LSD) market has seen a tremendous growth, reaching a total value locked of more than $22 billion in 2023, according to a report published by digital asset firm HashKey Capital. This market capitalization of LSD projects has also reached $18 billion.

The growth of the LSD protocols is beneficial for the respective communities and tokenholders, however, it also brings risks that need to be addressed. The report states that decentralization is a major concern, as many LSD protocols rely on a small number of node operators that control a large number of validator nodes.

The report highlights that the best web 3.0 crypto projects should focus on decentralization, in order to ensure that the Ethereum ecosystem is not harmed by the development of these protocols.

The Risks of Centralization in Liquid Staking

The report points out that centralization in liquid staking can have numerous adverse effects on the ecosystem, such as reduced competition and increased risk of censorship. It states:

Furthermore, as it gets more centralized, there is a heightened risk of decreased security, as big staking players can make it easier for attackers to carry out 51% attacks. Additionally, there is also an increased possibility of collusion.

“Centralized stakers can collude to carry out actions that go against the decentralization ethos and against the users, such as malevolent MEV extraction and frontrunning,” the report reads.

Although there are centralization risks, HashKey also acknowledges that many protocols are very recent and have plans to decentralize and add distributed validator technology to their protocols for better decentralization and resiliency.