To begin, controlling 33% of a network’s stake means you are able to also control whether a network runs or not. More skin means more stake. So skin accumulation works against decentralization. It’s hard to support decentralization when your business model and investors expect you to capture every token of delegation possible. Why would they want to disrupt it, especially if they’ve raised large funding rounds and have investors to satisfy? Why is stake continuing to centralize? The issue manifested very soon after the mainnet launch, when stake consolidated among a very small number of validators. It’s also easier for a small number of operators to be manipulated by any number of bad actors or even governments. You’ll even see 1,000s of Ethereum validators. I don’t see how this acquisition “… Delegators don’t often consider spreading their stake among a diverse group of operators. However, look closer and you’ll see that stake is still highly concentrated at the top. However, at a certain point, it becomes a paradox. In fact, I’ve heard anecdotally that staking-as-a-service providers are offering implementations that can scale to 100,000s of ETH validators for their largest clients.
They look at a block explorer, which stacks the odds in large validators’ favor by default sorting validators by stake, with the largest stakes at the top of the list. Large whale validators also emerged, after showing little to no presence in the testnets leading to launch. I published those thoughts after calling attention to the problem during early Cosmos testnets. Since then, it’s become clear that stake centralization isn’t unique to Cosmos. Stake in these networks isn’t decentralized. Sure, you may see networks with 100’s of validators. Staking networks continue launching at a fast pace. There’s a lot of excitement in the staking economy these days. So, Is the Staking Economy Doomed? So, What’s the Big Deal? Well, if you’re coming from the legacy financial services industry, with big pockets and lots of money to spend, it’s not a big deal at all. I don’t believe it’s too late. Validators talk the decentralized talk, yet don’t walk the walk. These validators can accumulate large stakes through their privileged access to capital, run a validator, pay someone to do it for them or delegate to one of the big validator operators. Staking token prices continue soaring in this current bull run.
The current state of stake centralization is actually exactly the exploitable condition that can be leveraged by such participants to make their next million, millions or billions. After that, they can sit back and watch their bag grow, without participating in the community in any meaningful way. This post appeared originally on The Defiant under the title “‘Rich Getting Richer in PoS Chains:’ By Chainflow’s Chris Remus.” You can read the original on The Defiant, here. At the same time, I also held reservations about staking’s rich get richer problem. In theory, as I mentioned above, some, if not most, staking protocols encourage the rich get richer scenario, using the skin in the game argument as cover. Furthermore, relying too heavily on the skin in the game argument provides cover for larger operators who use it to accumulate huge and disproportionate stakes. My sense is that for those who are unaware of or choose to not engage in this centralization dialogue to become engaged, they’ll have to experience a disruption.
At the same time, experience tells me that there are people out there who truly care about fully manifesting the power of a decentralized future. Delegators see who has the lowest fee among the top 3 to 5 validators by total stake and pile their delegation on to the already disproportionately large holdings. If you look closer there, you’ll see that the number of unique operators is much smaller. Choose a popular staking network and you’ll likely see high stake concentration among a very small number of validators. They prioritize short-term returns over long-term network sustainability, health and security. I do believe it’s possible for stake to decentralize over time. It’s not an easy problem to address, yet with so many brilliant people doing really disruptive things in crypto, it’s possible. Yet if you truly care about decentralization, stake centralization is a problem. Is it really that hard to decentralize stake? The bigger validators among whose stake is centralized have a good thing going. They have to become louder. Then Why Is this Happening? Why is stake centralized?