# Liquid staking maximalism * At home staking is not capital efficient (without restaking) * A lot of capital is sitting around with an arguably "tiny risk" * at least that's what the market thinks * This is like asking an insurance to keep enough money around to pay *all* claims in cash at any time. It is impractical * Reality: People build solutions to reuse the capital * LSTs significantly disadvantage home stakers * They also build moats using reputational capital and technology * Restaking solutions can bring some advantages to home stakers, but not all * Both of these make proportional slashing irrelevant (the offending party will only provide a small amount of the capital) * There is no easy way to "restake" from a bad provider (because exits are so slow), even if the community decides they are censoring and most ETH holders would prefer "redelegating" * Staking yields are "internal" to the protocol in that they are only a redistribution between stakes and naked ETH holders. However by trying to make "naked ETH" the default for liquidity, we are imposing significant friction on the system that would not be there if most ETH were staked *Goal:* Design a staking system that is more efficient for Ethereum ## Two tiers of staking capital **Tier 1** $C_1$: At risk. This is capital provided by the staker themself. It attracts the higher staking interest $r_1$. It will be fully slashed on misbehaviour. It can only be staked/unstaked through queues that guarantee weak subjectivity does not get too short. **Tier 2** $C_2$: Each position of tier 1 capital can create, by depositing Ether, a liquid staking token. The capital will accrue a lower interest rate $r_2$. The provider collects an adjustable fee from this, the rest accrues to the staking token. It is not at risk and can be withdrawn instantly at any time. It can also be deposited at any time, but only a maximum amount up to $C_2 = g C_1$ can be deposited for a staking position, guaranteeing a fraction of at least $\frac{1}{1+g}$ of tier 1 capital staked. Suggested constants: $g=19$ $r_1$ to be determined algorithmically similar to current staking returns, however bottoming out at a rate slightly higher than $r_2$, e.g. $r_1 \geq 1.05 r_2$ $r_2$ fixed rate to encourage delegation, e.g. $1\%$ ## Analysis The system is opinionated -- by chosing certain parameters, it tries to separate the tier 1 risk capital (that provides economic security) from tier 2 capital (that does not provide economic security, but allows the community to delegate and choose aligned stakers, for example those staking from home (providing decentralization) and in different jurisdictions (providing censorship resistance). Not all parameters will work -- if the difference between $r_1$ and $r_2$ is too big, then people will create new type of LSTs to add more tier 1 capital. A too small difference can be used in discouragement attacks. ### Economic security The economic security of the system is only provided by the tier 1 capital. If $g=19$, this will mean that at most $5\%$ of the Ether supply can provide economic security. At a \$100 billion market cap, that is still \$5 billion and enough to make double spending attacks unlikely. Ethereum does not rely on economic security for other types of attacks, e.g. on validity, and so this is probably good enough security. I think in reality, current LSTs alread massively reduce the economic security. Lido operators do not provide any guarantees beyond ther reputational capital, which can very quickly evaporate in certain situations. Economic attacks can currently be leveraged by a factor of 4 using Rocketpool, and should LEB4 be activated in the future it will be a factor of 8. I do not see why future staking protocol will not go all the way down to only requiring slightly more than 1 ETH staked per validator, which will mean that economic security will become less than in this proposal. ### Censorship resistance Censorship resistance is ultimately guaranteed by the Ethereum community, consisting of the node operators -- if they wish so. Currently, we hope that stakers do not censor, so we do not have to resort to the nuclear options of hard or soft forks. Adding delegation adds another layer of defense, by allowing the community to redelegate to non-censoring providers (at least as long as redelegation is not censored). This is much preferable to resorting to the nuclear option. ### Efficiency This solution does not require large portions of unstaked Ether, because the liquid tier 2 capital tokens are extremely liquid and exchange rates guaranteed by the protocol. Users can freely choose between the tokens, knowing that they are all equivalent, allowing them to vote only with their conscience for what they believe is a reliable provider (who will not attack or censor the network).