A liquid staking protocol allows users to stake their tokens to earn rewards while still retaining liquidity by receiving a tradable token that represents their staked assets.
The following information is gathered using ChatGPT Deep Research.
In all, the ecosystems of Ethereum, Cosmos, and Solana recognize that staking, while vital for security and rewards, carries inherent governance implications. Each chain’s community is taking steps to balance convenience and liquidity (via exchanges and liquid staking) with decentralization. The dominant theme across discussions is that no single entity should be able to leverage user deposits to gain disproportionate control. Whether through self-imposed limits, protocol mergers, diversified validator selection, or new technical modules, the goal is to ensure user-staked assets don’t unintentionally centralize power in these blockchain networks. The ongoing debates and solutions are a testament to the community vigilance in preserving decentralization even as staking services evolve.
Ethereum
| Token (Symbol) | Est. Annual Yield | % of Total Staked ETH | Governance Power / Beneficiaries |
|---|---|---|---|
| stETH | ~3–5% | ~28.5% | Lido DAO; validators chosen by DAO |
| rETH | ~3–5% | ~2–3% | Rocket Pool DAO; node operators stake RPL |
| cbETH | ~3–5% | ~13.6% | Coinbase (centralized issuer) |
| sfrxETH | ~4–5% | ~0.3% | Frax DAO; validators managed by protocol |
| osETH | ~3–4% | ~0.9% | StakeWise DAO; vault creators manage validators |
| BETH | ~2.5–7% | ~7% | Binance (centralized issuer) |
| Kraken ETH Staking | ~2.5–7% | ~8% | Kraken (centralized issuer) |
Ethereum has off-chain governance, but a protocol with 66%+ of validators could enforce changes de facto (e.g. propose only blocks from their fork). No direct way to mint ETH through governance — needs social coordination.
Ethereum Governance Power & Risks
Staking on Ethereum does not confer formal voting rights in protocol upgrades (Ethereum governance is off-chain), but control of validators equals influence over block production and network security. Thus, “governance power” in this context refers to the ability to affect consensus (e.g. proposing blocks, transaction inclusion, censorship or outage resilience). Key risks emerge if too much stake is concentrated:
- Validator Collusion / 51% Attacks: If a single entity or coordinated group controls a majority of validators, they could censor transactions or even rewrite parts of the chain. Ethereum’s design requires ≥66% of validators to finalize blocks – a cartel with two-thirds of stake could finalize only their chosen blocks and potentially violate liveness or safety of the chain. Even >33% control is dangerous: Ethereum researchers note that if one staking pool exceeds 1/3 of stake, it becomes a “centralization attack” on PoS finalitydecrypt.co. For instance, Ethereum Foundation researcher Danny Ryan warned in mid-2022 that “Lido passing 1/3 is a centralization attack on PoS… staking in Lido at these thresholds has a lot of [tail risk]” decrypt.co.
- DAO or Custodian Capture: When users stake through intermediaries (Lido, exchanges, etc.), they entrust governance power to those entities. This creates a single point of failure – if the DAO’s governance is hijacked or an exchange is compromised/coerced, the huge pool of user-owned validators could be manipulated. For example, a malicious takeover of Lido’s LDO-governed DAO could theoretically reassign its 30% of validators to colluding actors or change withdrawal keys. Similarly, an exchange with a large stake could be forced by regulators to censor certain transactions (indeed, after OFAC sanctions in 2022, some large staking entities only included “compliant” transactions, leading to censorship concerns). These scenarios put the entire network at risk, not just the individual stakers.
Ethereum Community Sentiment
The Ethereum community is very aware of these centralization risks and has engaged in active debate:
- Calls for Self-Limitation: Many community members have argued that no single staking service should dominate. Ethereum Beacon Chain community lead Superphiz famously challenged providers: “Who will be the first staking provider to publicly commit to limiting themselves to not more than 22% of validators on the chain?” decrypt.co. Even Vitalik Buterin suggested that large pools should “price themselves out” if they grow too big – “if a stake pool controls >15%, it should be expected to keep increasing its fee rate until it goes back below 15%” decrypt.co. This implies big pools like Lido or Coinbase should disincentivize further growth once they hit a safe threshold (~15% was Vitalik’s guideline).
- Lido’s Response: In mid-2022, Lido considered a governance proposal to self-limit its market share. However, the Lido DAO overwhelmingly voted against imposing any cap (over 99% of LDO votes rejected the limit)decrypt.co. Lido’s community reasoned that capping Lido would simply push users to other (potentially less transparent) platforms, and preferred to continue growing. This decision was controversial. Decentralization advocates were disappointed – they worry Lido’s dominance (which was ~31% of ETH staked at the time decrypt.co and has remained around ~30% since) could undermine Ethereum’s neutrality. On the other hand, some argued that Lido’s internal decentralization (with many node operators) and Ethereum’s ability to withdraw stake mitigate the risk (users can leave Lido if it misbehaves stakingrewards.com).
- Preference for Decentralized Alternatives: A segment of Ethereum stakers intentionally choose services like Rocket Pool or solo staking to support network health. These users often cite the need to “Exit Lido” or at least diversify stake. Social media and forums frequently discuss Ethereum’s “Nakamoto coefficient” (number of entities needed to reach >33% stake) – currently just a small handful of players (Lido, a couple exchanges) could collude to hit that threshold. This is viewed as antithetical to Ethereum’s decentralization ethos. Efforts like Rocket Pool, StakeWise, and new protocols are celebrated in the community for spreading out stake (Rocket Pool’s ~2% share is small but growing). Core developers and researchers keep a close eye on staking concentration and have floated ideas like making large pools charge higher fees (as Vitalik suggested) or even protocol changes if centralization gets out of hand decrypt.co.
In summary, Ethereum’s staking landscape is varied: users can stake ETH natively or through various pools, but doing so via large providers (Lido, exchanges) transfers a great deal of influence to those entities. The community acknowledges the convenience of these solutions but remains vigilant about their growth. Prominent voices continuously stress the importance of decentralizing ETH staking to avoid scenarios where one DAO or company could “capture” Ethereum’s consensus decrypt.co. This ongoing dialogue shapes how new staking products are designed (with Rocket Pool’s decentralized model and others trying innovative approaches to keep power distributed).
Cosmos
| Token (Symbol) | Est. Annual Yield | % of Total Staked ATOM | Governance Power / Beneficiaries |
|---|---|---|---|
| stATOM | ~13.9% | ~1.7% | Stride DAO; Cosmos validators receive stake |
| stkATOM | ~15.7% | ~0.5% | pSTAKE (Persistence); Cosmos validators |
To pass malicious proposals: control >50% of voting ATOM in quorum → ~45–50 million ATOM (with low turnout, possibly less).
To veto block proposals: ~74 million ATOM (33.4% of all staked).
Cosmos Governance Power & Risks
In Cosmos Hub, governance is on-chain and stake-weighted – meaning control of staked ATOM translates directly to voting power over network proposals (upgrades, parameters, community spend, etc.). This makes the distribution of staked tokens crucial for decentralized decision-making. Key risks if user assets’ voting power concentrates include:
- Supermajority Control (66%+): Cosmos proposals typically pass with a >50% majority (quorum requirements apply and >66.6% “Yes” can veto others in some cases). If a single entity or aligned group controls two-thirds of staked ATOM, they could pass any governance proposal unilaterally, potentially implementing malicious code or redirecting funds from the community pool. They could also halt the chain – in Cosmos’s Tendermint BFT, if ≥33% of stake goes offline or refuses to sign blocks, new blocks cannot be produced. Thus, a cartel with over 1/3 stake could stop the network or veto any proposal (via NoWithVeto votes). The Cosmos Hub today is fairly decentralized (the top 10 validators hold ~43% of stake, not one entity atomscan.com), but liquid staking could change this if one protocol amassed a huge share of ATOM.
- Validator Collusion / DAO Capture: The introduction of liquid staking protocols adds new dimensions for collusion. For example, if Stride’s DAO (STRD holders) were compromised or motivated to act selfishly, they could delegate the vast ATOM under management to only a few friendly validators, or vote in Cosmos governance in a bloc. The Cosmos community recognized this risk – hence Stride’s plan to merge with ATOM governance to remove the separate STRD governance layer blockworks.co. Similarly, if an exchange like Binance controlled say 15-20% of ATOM stake and decided to vote in concert with a couple of large validators, they could swing votes or form a veto bloc. LSD providers and exchanges effectively act as aggregators of many users’ voting power, so if they fall under one decision-making umbrella, the risk of governance capture increases. Cosmos Hub could find itself with decisions controlled by a handful of actors (be it a big exchange or a liquid staking DAO) rather than the broad community of ATOM holders.
- Reduced Governance Participation: Liquid staking can inadvertently dampen individual participation in governance. Many ATOM stakers who delegate natively at least have the opportunity to vote on proposals (and many do, or expect their validator to vote in line with their interests). If those ATOM instead reside in a liquid staking contract, the average user might not bother (or have the ability) to vote their fraction. Unless a mechanism like Quicksilver’s proxy voting is implemented, LSD tokens might sit idle in governance, effectively lowering turnout and making it easier for a small active group to meet quorum and pass proposals. This “governance power vacuum” is a subtle risk – power shifts by absenteeism. Some protocols may choose to abstain entirely (neutral), but that still removes those tokens from the active voting populace. The Cosmos community is discussing these concerns; for example, Quicksilver’s design explicitly tries to keep users votingstakely.io, and there are Cosmos SDK improvements (the Liquid Staking Module, LSMstakely.io) being considered to safely integrate liquid staking without losing voting capabilities.
Cosmos Community Sentiment
The Cosmos community highly values decentralization and has been proactively debating staking solutions:
- General Acceptance with Caution: Liquid staking in Cosmos is still in early stages (only ~5–6% of ATOM’s staked supply was liquid-staked as of Q1 2024messari.io), but its growth has prompted discussions. Many community members see the utility in LSDs – enhancing ATOM liquidity and yield – but are wary of recreating an “ETH/Lido scenario” on the Hub. The Stride merger proposal in late 2023 crystallized this sentiment: Stride’s team themselves noted it was better for ATOM holders to govern the LSD protocol to avoid centralizationblockworks.co. This proposal led to lively debate on the Cosmos Hub forum and social media. Some ATOM holders welcomed the idea of the Hub “owning” its liquid staking (strengthening ATOM’s value proposition and preventing a separate token from accruing power). Others were skeptical about the merger – concerned it was too soon, or questioning how STRD holders converting to ATOM might dilute current ATOM holders. After a week of discussions, the plan was shelved for the time being due to “too much division and not enough consensus” between the Hub and Stride communitiesblockworks.co. This outcome shows that Cosmos governance is working as intended – major changes undergo extensive community scrutiny. While the merger is paused, the conversation significantly raised awareness of LSD-related risks and aligned Stride more closely with Hub interests going forward.
- Desire to Preserve Governance and Decentralization: On Cosmos forums and in community calls, participants often emphasize that liquid staking should “do no harm” to chain governance. The introduction of the Liquid Staking Module (LSM) is one attempt to integrate LSDs at the protocol level safely, allowing staking derivatives without breaking the link to governance. Projects like Quicksilver have been lauded by community members for their approach to let users vote and choose validators even when using LSDstakely.io. The community sentiment leans towards plurality and competition – multiple LSD providers (Stride, Quicksilver, etc.) are encouraged rather than one monopolist. There is also emphasis on LSD providers distributing their stake across many validators (to not amplify the rich-get-richer effect among validators). In Cosmos, validators themselves are community members, and many top validators have weighed in: some welcome LSDs as increasing total stake and security, while others caution that if delegations concentrate into LSD platform-chosen validators, smaller independent validators could lose delegations. Initiatives like Stride’s and Quicksilver’s broad delegation policies are responses to these concerns.
- Exchange Influence: The Cosmos community has historically been cautious about exchange-run validators having too much voting power. There have been instances where exchanges (like Binance or Poloniex in early days) constituted a large percent of voting turnout. Community discussions (on Commonwealth and Reddit) have questioned whether exchange custodial staking should be limited or if exchanges should abstain from governance votes to avoid conflict of interest. While not a crisis currently, it’s understood that if, say, Binance Staking and a liquid staking provider ended up aligning, they could together sway proposals. Thus, decentralization advocates in Cosmos continuously promote delegating to a diverse set of validators and participating in governance personally. “Not your keys, not your vote” is a mantra – meaning if you let someone else hold your ATOM (like an exchange or even a liquid staking zone), you’ve effectively let them exercise your vote.
In summary, Cosmos ecosystem participants are guardedly optimistic about staking innovations: they see liquid staking as an important piece of interchain DeFi, yet they are actively engineering solutions (like proxy voting and potential protocol mergers) to ensure governance power remains widely distributed. The prevailing sentiment is that Cosmos must avoid the pitfalls of centralization by making liquid staking an extension of the community rather than an external force. Debates on forums and Twitter reflect a strong commitment to keeping the Cosmos Hub “by the token holders, for the token holders,” even as new staking derivatives emerge.