How Does “Liquid Staking” Introduce a New Layer of Risk to PoS Security?
Liquid staking introduces a new layer of risk by creating a liquid derivative token (LST) that represents the user's staked asset. This token can be traded or used in DeFi protocols, potentially centralizing control of the underlying staked assets in the hands of a few LST protocols.
If a single liquid staking protocol controls over 51% of the staked tokens, it could theoretically collude to perform a malicious attack without having to acquire the tokens directly, creating a single point of failure and centralization risk.
Glossar
Liquid Staking Protocol
Yield ⎊ Liquid staking protocols represent an evolution in Proof-of-Stake consensus mechanisms, enabling cryptocurrency holders to earn staking rewards without directly operating validator nodes.
Single Point of Failure
Concentration ⎊ In crypto derivatives, this risk materializes when excessive collateral or governance control resides with a small number of entities, such as a few large liquidity providers or key developers.
Liquid Staking
Mechanism ⎊ Liquid Staking is a decentralized finance primitive that allows users to stake their tokens in a Proof-of-Stake protocol while simultaneously receiving a liquid, tradeable derivative token representing their staked position and accrued rewards.
Liquid Staking Derivative
Token ⎊ A liquid staking derivative (LSD) is a financial token issued to a user upon staking their native cryptocurrency in a Proof-of-Stake protocol, representing both the staked principal and the accrued staking rewards.