“Maintaining Ethereum’s Decentralization: The 22% Self-Limit Rule and Its Implications”
In a bid to uphold the decentralized nature of the Ethereum network, at least five liquid staking providers have adopted or are in the process of adopting a self-imposed limit, ensuring they do not control more than 22% of the Ethereum staking market. This move aims to prevent centralization concerns from becoming a reality.
Among these providers are Rocket Pool, StakeWise, Stader Labs, and Diva Staking, as confirmed by Ethereum core developer Superphiz. Puffer Finance, another liquid staking service, has also committed to this self-limit.
The rationale behind the 22% limit is rooted in Ethereum’s consensus mechanism, which requires 66% of validators to agree on the state of the network for transactions to be considered final. By setting the limit below 22%, it becomes necessary for at least four major entities to collude in order to achieve network finalization. Finality in blockchain terms ensures the immutability of transactions within a block.
The concept of self-imposed limits emerged in May 2022 when Superphiz questioned whether staking pools would prioritize the network’s health over their own profits.
Notably, the largest Ethereum liquid staking provider, Lido Finance, rejected the idea of self-limitation with a resounding 99.81% majority vote in June. This decision sparked concerns as they expressed an intention to control the majority of validators on the Ethereum beacon chain.
Currently, Lido dominates the Ethereum staking market, accounting for 32.4% of all staked Ether, while the next-largest entity, Coinbase, holds only 8.7%, according to data from Dune Analytics.
The Ethereum community has mixed reactions to this development. Some argue that the self-limit proposal doesn’t align with the principle of “Ethereum alignment,” which aims to maintain credibility, neutrality, and permissionless innovation on the network. They suggest that those pushing for the proposal might act differently if they were in Lido’s position.
Others, however, express concerns about potential centralization issues and view Lido’s market dominance as both “disgusting and selfish.”
In summary, the adoption of a 22% self-imposed limit among Ethereum staking providers is a contentious issue within the Ethereum community, with some advocating for decentralized control while others argue in favor of market freedom and rational economic decisions.