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In Proof of Stake, Both Exchange Staking and LSD/LST Staking Are Centralized

Donald McIntyre

In Proof of Stake (POS) networks, both exchange staking and "decentralized" staking are centralized. Ethereum is 100% censorable. If they indicate that less than that is censored, it is just that authorities have not enforced their capacity over 100% of the network, yet.

There is no such thing as staking being decentralized because of calls to goodness. Social consensus is broken by definition ("social" means the community rules, and blockchains were invented precisely to avoid trusted third parties!).

Liquid staking derivatives (LSD), also called liquid staking token (LST) staking, on Lido or RocketPool are openly and obviously centralized for anyone with 101 level of economics.

It is not necessary to mention why staking through centralized exchanges is centralized, but LSD staking is as broken as BitcoinCash (BCH), with its 32 megabyte block size, is broken by design. LSD/LST or "decentralized" staking is centralized.

There are 4 components and one overarching constraint in LSD/LST systems:


  • The liquid staking derivatives or tokens per se (LSD/LST).
  • The stakers who put the money to stake.
  • The pool smart contract, which is really a team of developers plus some investors directing everything.
  • The validators, who are the operators that put the data centers with machines to validate.

Overarching constraint:

  • POS has penalties and slashing, which impose a system of terror.

Explanation of how the components and the constraint mentioned above make POS networks centralized:

  • The LSD/LST's have no effect on the staking method. It only makes the stakers hyper leveraged speculators because they can stake and re-stake their ETH coins multiple times in multiple protocols and this creates the typical banking fractional reserve problem where one unit of value is used multiple times, in multiple ways, in the economy.

  • The stakers who put money are anonymous for now, but since pools such as LIDO and RocketPool are obviously securities and they are centralized organizations disguised as smart contracts, they will very soon be forced to do KYC and AML to all their clients, including the stakers. So the smart contract is worth zero, it has no use whatsoever.

  • The pool smart contract is just a fronting that hides a standard legal setup organization behind where you have partners (the team plus investors) controlling it. Whenever or wherever you have two or more persons get together to form a business, then you have a legal partnership under most laws everywhere. DAOs are that. They are useful to implement the legal rules of partnerships and corporations, but they are not "decentralized" nor "autonomous".

  • The validators are vetted and filtered by LIDO/RocketPool. They have to be because they have to ensure that they minimize downtime and penalties. This is the final straw that kills POS.

  • What Vitalik has been saying for years, that the penalties and slashing are the key "cryptoeconomic" security guarantee of POS is not true. It is the key to centralization because it is impossible for nodes around the world to guarantee the uptime and consistency of large centralized data centers that are located in strategic places. Therefore, everybody has to flock to the big pools.

POS has so efficient economies of scale because of two reasons:

  • Staking is frictionless as it is just a deposit in the ledger, therefore power law is unlimited.

  • The penalties impose a system of terror that leads everybody to stake through the centralized players because the bigger they are the less vulnerable they will be to the failures and penalties.

And we have not mentioned the legal dramas that are coming in all POS systems as the slashing in itself is a recipe for constant litigation between the pools, the devs, and the foundations and promoters of these systems.

Thank you for reading this article!

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