HashKey report warns of potential harm to Ethereum ecosystem from liquid staking.

HashKey report warns of potential harm to Ethereum ecosystem from liquid staking.

Understanding the Risks of Liquid Staking and the Need for Decentralization in the Blockchain Industry

Blockchain technology continues to evolve and bring about unprecedented opportunities and risks. One emerging trend in the industry is liquid staking, which offers attractive benefits but also poses considerable risks. In a recent report published by digital asset firm HashKey Capital, it is highlighted that the liquid staking derivatives (LSD) market has grown exponentially, reaching a total value of over $22 billion in 2023, with a market capitalization of $18 billion for LSD projects. While this growth is promising, it also brings forth the need for better decentralization to safeguard the blockchain ecosystem.

The Rapid Growth of Liquid Staking

Liquid staking enables users to stake their tokens on proof-of-stake (PoS) networks while still maintaining liquidity. This approach allows token holders to participate in staking rewards and benefit from the increasing value of their tokens, without having to lock them up for an extended period. As a result, liquid staking has gained traction among crypto enthusiasts looking for flexible investment options.

The rapid growth of the liquid staking market can be attributed to the benefits it offers. However, it is crucial to understand the potential risks associated with this trend. The report highlights that many LSD protocols heavily rely on a limited number of node operators who control a significant portion of the validator nodes. This concentration of power raises concerns around centralization within the blockchain ecosystem.

Centralization Risks and their Implications

Centralization in liquid staking can have detrimental effects on the blockchain ecosystem. The report emphasizes the need to consider the number of node operators as a “point of concern for centralization.” When a small number of operators control a large number of validator nodes, it creates a centralized power structure that compromises the principles of transparency and decentralization that underpin blockchain technology.

One of the main risks of centralization is the potential for increased censorship. Centralized staking players could face incentives or regulatory pressure to censor specific transactions, disrupting the trust within the network. Moreover, as the liquid staking market becomes further centralized, security risks escalate. Large staking players with centralized control can make it easier for attackers to carry out 51% attacks, compromising the integrity of the blockchain network. Collusion among centralized stakers is another concern; they can collaborate to engage in malicious activities, such as malevolent Miner Extractable Value (MEV) extraction and frontrunning, which undermine the decentralized ethos and harm users.

The Importance of Decentralization and Future Plans

While the risks associated with centralization in liquid staking are evident, the report acknowledges that most protocols are still at a nascent stage. Many have recognized the need for decentralization and are actively working to mitigate these risks. One solution is the introduction of distributed validator technology to their protocols, which enhances decentralization and resiliency.

Decentralization is the cornerstone of blockchain technology, ensuring a trustless and transparent ecosystem. By distributing control and decision-making power across a network of participants, the risks of centralization can be minimized. Each participant, or validator, contributes to the security, consensus, and governance of the blockchain, fostering a resilient and censorship-resistant environment.


The liquid staking market has shown remarkable growth in recent years, with significant financial value locked into various protocols. However, the risks associated with centralization in this space cannot be ignored. The concentration of power in the hands of a few node operators poses threats to the Ethereum ecosystem and the principles of decentralization.

To address these risks, it is imperative that protocols in the liquid staking space prioritize decentralization and actively work towards implementing distributed validator technology. By embracing the core tenets of blockchain technology, including transparency and trustless operation, the industry can achieve a more resilient and secure ecosystem.

Ultimately, only through better decentralization and collaborative efforts can the blockchain industry mitigate the risks presented by the rapid growth of liquid staking and ensure the long-term sustainability and success of the technology.