With a technology as powerful as liquid staking, it is easy to get ahead of your skis and go all in. Trust me, I am tempted; however, it is crucial to evaluate not just what the benefits are of this innovation, but also look at the risks.
So, let’s start there and see what kind of obstacles could possibly stand in our way.
Understanding the Risks
One of the first concerns that I have with liquid staking is that one protocol is able to successfully consolidate a large amount of governance tokens within the confines of its smart contracts. If successful in attracting many stakers and delegating these tokens to a relatively small group of hand-picked validators, the protocol could centralize governance ownership and essentially take control of the blockchain. This is especially important in light of the fact that not every liquid staking protocol allows the user to retain governance voting rights.
No evaluation of risks can ignore the possibility of the underlying smart contracts being exploited. The reliance on carefully audited code and multiple waves of testing practices are crucial.
The balance of validator shares for blockchains joining the liquid staking innovation will likely be upset, as users redeploy their assets to take advantage of the…
