Liquid Staking Tokens (LSTs): Tokenized Staking Representations and Their Impact on Ethereum Security

Core Concepts

Liquid Staking Tokens (LSTs) function as tokenized representations of staked native assets while also accruing staking rewards, emerging as a preferred method of staking within Proof of Stake (PoS) blockchains due to their ease of use and tradability.

Abstract

The paper establishes a general framework describing the design choices and protocols underlying liquid staking. It then employs the framework to systematically compare the top LST implementations, examining their node operator selection, validator operations, and staking rewards distribution models. The paper further discusses security concerns associated with liquid staking, its implications for PoS blockchain security, and Distributed Validator technology (DVT) as a potential solution. Finally, it empirically analyzes LSTs' performance and finds that the design choices and market events affect peg stability, with centralized LSTs being more efficient in tracking staking rewards.
The key highlights and insights are:

LSTs function as tokenized representations of staked native assets, allowing users to accrue staking rewards while maintaining token liquidity.
LSPs vary in their approaches to node operator selection, validator operations, and staking rewards distribution, with major differences in centralization levels.
Distributed Validator Technology (DVT) is a recent advancement that improves protocol security by distributing validators' keys to multiple node operators.
LSTs are pegged tokens that operate a similar mechanism to stablecoins, with market prices tracking staking rewards with varying accuracy.
Decentralized LSTs can temporarily de-peg upwards when there are insufficient node operators to run validators.
LSTs, especially with DVT implemented, do not pose a direct security risk for the Ethereum network, but the growing dependence of DeFi on LSTs might affect Ethereum's security.

Stats

The minimum threshold amounts of staked ETH required for the Ethereum attacks are:

33% for delaying finality
34% for causing double finality
51% for censorship and controlling the blockchain future
66% for censorship, controlling the blockchain future and past

Quotes

"Liquid Staking Tokens (LSTs) function as tokenized representations of staked native assets while also accruing staking rewards."
"LSPs vary in their approaches to node operator selection, validator operations, and staking rewards distribution, with major differences in centralization levels."
"Distributed Validator Technology (DVT) is a recent advancement that improves protocol security by distributing validators' keys to multiple node operators."

Key Insights Distilled From

SoK

by Krzysztof Go... at arxiv.org 04-02-2024

https://arxiv.org/pdf/2404.00644.pdf

Deeper Inquiries

How might the growing dependence of DeFi on LSTs impact the overall security and resilience of the Ethereum network in the long run?

The increasing reliance of Decentralized Finance (DeFi) on Liquid Staking Tokens (LSTs) could have significant implications for the security and resilience of the Ethereum network over time. As LSTs become the dominant form of staking within Proof of Stake (PoS) blockchains, the concentration of staked assets in LSTs raises concerns about the potential centralization of control and the associated security risks.
One key impact is the risk of centralization, especially if a single LSP, such as Lido, controls a significant portion of the staked ETH. This concentration of power in a single protocol could lead to vulnerabilities, such as the potential for collusion among node operators or the risk of a coordinated attack on the network. Additionally, if a large portion of staked ETH is locked in LSTs, it could reduce the overall decentralization of the network, making it more susceptible to attacks or manipulation by a small group of actors.
Moreover, the reliance on LSTs introduces new attack vectors and risks to the Ethereum network. For example, if a significant portion of staked ETH is in LSTs, an attacker could target these tokens to disrupt the network or manipulate the staking process. This could lead to issues such as finality delays, double finality, or chain splits, compromising the security and stability of the network.
In the long run, the growing dependence of DeFi on LSTs could impact the overall security posture of the Ethereum network by potentially increasing centralization, introducing new attack vectors, and reducing the network's resilience to adversarial actions. It is essential for the Ethereum community to address these challenges proactively to ensure the continued security and decentralization of the network.

What are the potential risks and drawbacks of the centralized governance and operations models employed by some LSPs, and how can they be mitigated?

Centralized governance and operations models employed by some Liquid Staking Protocols (LSPs) pose several risks and drawbacks that could impact the security and decentralization of the network. One of the primary risks is the concentration of decision-making power in the hands of a few entities, which can lead to governance issues, lack of transparency, and potential manipulation of protocol parameters for personal gain. Centralized governance also raises concerns about censorship, lack of inclusivity, and the potential for single points of failure.
Furthermore, centralized operations models in LSPs can introduce vulnerabilities, such as the risk of collusion among node operators, the potential for insider attacks, and the lack of diversity in the validator set. This centralization of control can undermine the security and resilience of the network, making it more susceptible to attacks and manipulation.
To mitigate these risks and drawbacks associated with centralized governance and operations models in LSPs, several strategies can be implemented:

Transition to Decentralized Governance: LSPs should aim to transition towards more decentralized governance models, where decisions are made collectively by the community through transparent and inclusive processes like DAOs. This can help distribute decision-making power and ensure that the interests of all stakeholders are represented.

Implementing Distributed Validator Technology (DVT): Adopting DVT solutions can enhance the security and resilience of LSPs by distributing validator keys among multiple node operators, reducing the risk of single points of failure and increasing the protocol's overall robustness.

Encouraging Node Operator Diversity: LSPs should promote a diverse set of node operators to enhance decentralization and reduce the risk of collusion. Implementing mechanisms to onboard new node operators and incentivizing participation can help create a more resilient and secure network.

Enhancing Transparency and Accountability: LSPs should prioritize transparency in their operations, including clear communication of governance decisions, regular audits of protocol security, and mechanisms for reporting and addressing potential vulnerabilities. This can help build trust among users and ensure the integrity of the network.

By addressing these risks and drawbacks through decentralized governance, enhanced security measures, and transparency, LSPs can mitigate the potential negative impacts of centralized models and strengthen the overall security and resilience of the Ethereum network.

What other innovative solutions or approaches could be explored to further enhance the security and decentralization of liquid staking while maintaining its benefits?

Multi-Sig Validator Keys: Implementing multi-signature (multi-sig) validator keys can enhance security by requiring multiple signatures to validate transactions, reducing the risk of a single point of failure and increasing resilience against attacks.

Dynamic Node Operator Selection: Introducing a dynamic node operator selection process based on performance metrics, reputation, and decentralization criteria can promote a more diverse and secure validator set, enhancing network resilience.

Cross-Chain Compatibility: Exploring cross-chain compatibility for LSTs can increase interoperability and reduce dependency on a single blockchain, mitigating risks associated with network-specific vulnerabilities and enhancing overall security.

Incentivizing Decentralization: Designing incentive mechanisms to encourage decentralization, such as rewarding node operators for maintaining a diverse and secure validator set, can promote a more resilient network architecture and reduce the likelihood of centralization.

Community-Led Audits: Empowering the community to conduct regular audits of LSPs, validate security measures, and report vulnerabilities can enhance transparency, accountability, and overall network security.

By exploring these innovative solutions and approaches, LSPs can further enhance the security and decentralization of liquid staking while maintaining the benefits of tokenized staking assets, such as liquidity, tradability, and increased participation in staking activities.