Thoughts on how to address LRT threat and delegator apathy:
A primary threat to Eigen Layer (EL) is the centralization of stake. Currently delegators are likely "blindly" chasing airdrop points and/or depositing into LRTs that create incentivizes antithetical to a successful DPoS ecosystem. I hypothesize that the threats likely fall into two groups
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- apathetic delegators that are not pricing in the risk associated with the operators they delegate to
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- delegators that control massive pools of funds and act as a point of stake centralization (LRTs)
To address the former, the ecosystem should strongly push for information marketplaces that incentive operators and AVS teams to gain trust with delegators. This could include incentives to nominate small operators and diverse groups of operators in order to hedge risk against centralized operator failure (major downtime event due to automation, cloud provider going down etc). The EL foundation can 1) push education materials for delegators that highlight rational, risked adjusted selection criteria for operators and 2) use foundation funds to delegate to small operators who proactively participate in a bootstrap and transparency program. Ultimately, in order for EL's DPoS to be effective there needs to be an information marketplace about node operators and this requires a culture defining initiative.
At Parity I designed and implemented the nomination pools as a scaling solution to constraints in the NPoS elections and to combat centralization from parachains launching liquid staking. This inspires me to propose that the latter be addressed by: the EL foundation/governance funding the development of a common good LRT that focuses on incentivizing decentralization of the underlying delegated assets. The goal here is that the LRT protocol and its maintainers would not be able to be bribed to delegate in a specific way. I propose a design that permissionlessly enables the launch of delegation pools that mint the protocols LRT to pool participants. Entities that run each delegation pool would advertise to potential pool participants aspects like: risk management, return optimization etc. The pools would be incentivized to do ample research on their delegation strategy so they can advertise why their pool will outperform on X dimensions (security, returns etc). There is more thought that goes into establishing the economics of having separate pools minting the same token, but launching a meaningfully competitive common good LRT is likely essential for combatting stake centralization.
EL must prioritize initiatives that progressively decentralize core subsystems or face the fate of being regulated out of existence. Ensuring a healthy DPoS ecosystem through information marketplaces and decentralized delegation is core to that goal.
Edit: further ideas:
- Adjust yield curves to downregulate in large pools to create inverse incentive for centralizing control - still has sybil issues since you can create more pools, but maybe add friction for spinning up pools
- Maximize measures to create transparency in Pool and AVS partnerships & Pool and Wallet partnerships e.g. we don't want a wallet UI funelling all users exclusively too their pool and get kickbacks from the AVS
- Unknown: is there a way to have a single, fungible LRT that is redeemable across the different pools or does each pool need its own LRT?
- We are trying to create an apparatus that prices in numerous types of subjective risk - can we create frameworks to help quantify this in a digestable manner?