- Liquid Staking Protocols greatly affect the decentralization of PoS networks
- Most liquid staking providers have different delegation strategies (the method in which they distribute stake)
- These delegation strategies affect the likelihood of your stake being slashed (you losing your money)
- Before staking with any provider you should consider the number of validators delegated to and the quality of these validators
Greetings CPro community members! After you read our last piece on Liquid Staking, we hope you have at the very least considered staking your idle Proof of Stake assets with a liquid staking protocol. We at Cryptonary definitely want you to do the most responsible yield bearing actions with your tokens!
In the last piece, we explained the benefits of liquid staking and provided an in depth comparison of Lido and Marinade – two leaders in the sector. In this piece, you will learn why these protocols can make or break a network’s decentralization. We will explain the different delegation strategies of these two protocols, so you can understand exactly what happens to your tokens when you choose to stake with them. Some protocols delegate to just a few validators, while others delegate to hundreds. While these details may fly over the head of many, they play a key role in the decentralization and security of the network the protocol lives on, as well as the level of risk you are taking when you stake. For example, a liquid staking protocol that has 400 validators is likely more decentralized than another liquid staking protocol with only 20 validators; however, the quality of the validators may differ. While you should definitely stake with decentralization in mind, it’s also important to consider the quality of the validators you are staking with. Since different protocols have different methods of judging and on boarding quality validators, it’s important to have multiple liquid staking options. It’s good to have a backup protocol to use if the protocol you’re currently staking with fails (your stake gets slashed) or is too centralized (low amount of validators).
Without further ado, let’s get into it!
Disclaimer: Not financial nor investment advice. Any capital-related decision you make is your full responsibility.
What’s a Delegation Strategy?
Delegation strategies refer to how the liquid staking protocols provide stake to validators. For example if you were to deposit 100 SOL with a liquid staking protocol they could use one of the below delegation strategies:
- 100SOL to one validator
- 10SOL to 10 different validators
Delegation strategies vary greatly across providers. The variables include: what is considered a reliable validator, the requirements for a validator to receive stake (ie: acceptable hardware, consecutive up time), how many validators receive stake, the process of on boarding new validators, and so on. Before we get into these projects specifically, let’s review what a validator’s role is in Proof of Stake networks.
What is a Validator?
Validators are a key player in all proof of stake networks. While the exact roles of validators can vary depending on the network they are present on; generally they have a similar purpose. Validators process transactions and participate in consensus confirming or denying the current state of the ledger. In other words, validators make sure that all network participants, including me and you, are on the same page considering what the status of the network is. If a global state is not maintained, then you can run into problems such as the double spend problem. In short, the double spend problem is where one person can spend their cryptocurrency twice because the network did not debit their account and relay that information to all validators properly. If you are interested in learning more about the double spend problem, let us know and we’ll write a piece on it.
Now that we’ve covered the basics, let’s dive into how these protocols delegate stake. This will help us be able to make a rational decision about who we want to delegate our precious stake to.
Lido’s Delegation Strategy
Lido only accepts a small amount of highly performant nodes. The team has a “decentralize over time" approach, meaning they believe the risk of on boarding a large amount of validators early on is more of a risk to the protocol than centralization of stake. Lido’s view is stake can be decentralized over time, however the reputation risk and cost of slashed rewards from malicious/incompetent validators has the potential to irreparably damage the protocol. Lido currently stakes to ~46 separate node operators across Ethereum, Solana, and Terra. Many of these nodes are run by the same parent organizations such as Staking facilities, P2P, Blockdaemon, Figment, and EverStake.
New node operators are onboarded to Lido through an application and proposal process requiring approval from both the Lido DAO and a sub-DAO called the Lido Node Operator Subgovernance Group (LNOSG). LNOSG consists of Lido’s founding node operators, five node operators from Certus One, P2P, Stake.Fish, Staking Facilities, and Chorus One. These five organizations have proven expertise and experience to run high performance nodes. To give you an idea of their experience, take a look at these stats below.
- Chorus One & Certus One provide staking infrastructure for over 28 networks.
- Staking Facilities has ~1.9B AUM and staking on 12 networks.
- P2P has ~3.8B AUM and staking on 22 networks.
- Stake.Fish offers staking on 24 networks
While there is no explicit set of qualifications new node operators must meet, there is a general framework the founders have agreed on. The general requirements include: AUM (assets under management), dedicated team that can respond to potential incidents 24/7, experience in staking infrastructure, and how long the team has been operating nodes. The process of onboarding nodes is as follows:
- Node operator fills out google form application to be evaluated by LNOSG.
- LNOSG approves or disapproves of applicant(s). If LNOSG approves the applicant(s) application, LNOSG will create a DAO proposal to add them to the team.
- LNOSG consults the DAO on node operator decisions such as how many to on board each “round." It is not guaranteed the DAO will abide by these suggestions.
- DAO proposal gets voted on by Lido DAO. Lido DAO is ultimately responsible for all additions and modifications to the node operator set. If the proposal passes, the new node operator is added to the set.
It is important to note here that ultimately Lido DAO is responsible for all additions / subtractions of nodes. The DAO consists of the LDO token holders. While whales most definitely do have the most power, if you wanted to be a part of the DAO and help influence decision making, all you would have to do is buy some LDO tokens and make a post in their governance forum!
Now, onto Marinade.
Marinade’s Delegation Strategy
In comparison to Lido, Marinade has a more decentralized approach to delegating stake. On Solana, the top 19 validators are known as the “security set." The security set holds 33.52% of the network’s stake, meaning if this group of nodes were to be successfully attacked it would halt the network. Marinade contributes to Solana’s censorship resistance by only delegating to validators outside the security set. The main risk associated with this strategy is the more validators on boarded the more likely an incompetent or malicious validator will be included. Due to this fact, one can deduce Marinade may require a larger insurance fund than Lido, as an increase in validators may be correlated with increased risk of validator malfunction. Marinade currently stakes to 400+ validators.
Marinade ranks validators using the recommended method from the Solana Foundation to compute a validator score based on the validator’s APY, commission, performance, and level of decentralization. A percentage of Marinade’s total stake is delegated to validators based off their score. The better the validator’s performance, the more likely that validator will receive stake. There are a few conditions in which validators are ineligible to receive stake from Marinade. These conditions are if:
- validator has < 100 SOL staked
- validator is below 50th percentile in performance score
- is part of the security set
- if the data center where the validator is located concentrates more than 33% of the stake
The last bullet here is important. Not only are they focused on decentralizing stake “virtually” across many validators in the network, Marinade is also focused on physical decentralization. The more data centers validators are spread across, the less likelihood if one goes down due to a natural disaster or technical fire that it will halt the network. There are multiple layers to decentralization that include both the “virtual” delegation of stake and the physical locations of the nodes. Both must be considered before staking.
While Lido’s “decentralize over time approach” is logical and valid, Marinade thus far has been able to delegate stake to a large amount of validators in a responsible way. Whether it continues to be this way remains to be seen. Lido has also been very successful so far with their current strategy. This shows that different delegation strategies can be successful from both a decentralization and business perspective. From a user perspective, who your stake is delegated to is very important, both in terms of how reliable the validator is (to avoid your stake getting slashed), how many validators are associated with the protocol (this is how you contribute to decentralization), and where those validators are located physically (this is how you protect your stake against black swan events).
We at Cryptonary have staked with both protocols, and can attest (thus far) both have been reliable and we have not had any stake slashed. If you do value decentralization and grass roots validators, we would suggest going with Marinade over Lido. If you prefer to have your stake be delegated to a smaller group of highly reliable and professional validators, we recommend you stake with Lido. It is important to note both of these protocols have been highly performant and haven’t had any significant slashing events.
We hope this piece has been informative about how important who you stake with is to both your stake and the network. Until next time CPro!