The Cost of Misaligned Validator Incentives in Proof-of-Stake

When block rewards are low, validators maximize profit via Maximal Extractable Value (MEV), not protocol security. This creates a perverse incentive to censor or reorder transactions for private gain, undermining decentralization and finality guarantees.

• >60% of validator profits on some chains can come from MEV.
• Leads to centralization in sophisticated relay-builder markets like Flashbots.
• Creates a two-tier system where users subsidize validator profits.

Formalize the separation of block building from block proposing within the protocol itself, as Ethereum is pursuing. This neutralizes the validator's ability to censor or manipulate the transaction order for MEV, realigning incentives with honest block validation.

• Decouples profit motive from consensus role.
• Preserves validator decentralization by outsourcing complex building.
• Enables credible neutrality as a protocol primitive.

Low staking yields encourage validators to seek supplemental yield via restaking protocols like EigenLayer. This creates systemic risk by layering additional slashing conditions and correlated failures atop the base layer's security budget.

• Security is leased out, creating shared-slashing cascades.
• Validators become passive yield farmers, reducing vigilance.
• $15B+ in TVL introduces new, unproven economic attack vectors.

Move beyond simple slashing for double-signing. Implement automated, graduated penalties for liveness failures (e.g., missing attestations) and poor performance (e.g., slow block propagation). This makes pure yield farming unprofitable and ties rewards directly to reliable network service.

• Penalizes inactivity as severely as dishonesty.
• Incentivizes high-quality infrastructure and geographic distribution.
• Aligns APR with actual utility provided to the chain.

Users delegate to large LSD providers like Lido and Coinbase for convenience, creating centralization pressure. A few entities can control >33% of the stake, threatening the chain's cryptoeconomic security and creating regulatory single points of failure.

• Voting power concentrates in ~3 major providers.
• Creates governance capture risks and reduces censorship resistance.
• Staking becomes a commoditized service, not a participatory act.

Enforce decentralization through protocol-level tools. Distributed Validator Technology (DVT) like Obol and SSV Network splits validator keys across nodes, while quotas can limit any entity's stake share. This hardens the network against collusion and regulatory attack.

• DVT eliminates single points of failure for a validator.
• Protocol rules prevent any entity from exceeding a ~22% stake share.
• Makes staking robustly decentralized by design, not by hope.

Solana's high throughput and low fees created a perfect storm for maximal extractable value. Validators were incentivized to reorder transactions for private mempools like Jito, prioritizing MEV over network liveness. This led to repeated network congestion and outages, as the profit-maximizing strategy diverged from system stability.

• Problem: Validator profit from MEV > profit from base rewards.
• Consequence: ~15 hours of downtime in 2021-22, eroding user trust.
• Solution: Jito's own JTO token and stake delegation to align validators with a sustainable fee market.

The Cosmos Hub's high ~14% inflation-based staking rewards created a massive opportunity cost for unstaking. With a 21-day unbonding period, $2B+ in ATOM was perpetually locked, sacrificing liquidity and composability for perceived security.

• Problem: Security via illiquidity misaligns with a hub's need for capital fluidity.
• Consequence: Stagnant DeFi on the Hub versus thriving ecosystems on Osmosis and others.
• Solution: Liquid staking modules (LSM) and Interchain Security to decouple security from capital lock-up.

Ethereum's pre-PBS design allowed validators (proposers) to also be block builders, creating centralization pressure. Large staking pools like Lido and Coinbase could capture >90% of MEV by internalizing block building, making solo staking non-competitive.

• Problem: Validator profit from MEV created a centralizing, opaque market.
• Consequence: Risk of censorship and central point of failure at the builder level.
• Solution: In-protocol PBS (e.g., via EIP-4844 and danksharding) to enforce separation and auction block space openly.

Avalanche's subnet model allows custom blockchains to bootstrap security by leasing validator sets from the Primary Network (P-Chain). This creates a classic free-rider problem: subnets benefit from the underlying security without directly contributing to its cost, diluting the economic security of the core chain.

• Problem: Validator rewards on Primary Network are diluted by many subnets, reducing incentive to secure the core.
• Consequence: Potential under-provisioning of security for the $5B+ ecosystem backbone.
• Solution: Mandatory cross-subnet staking requirements or a security fee model to align incentives.