Proof-of-Stake is a cartel game. The protocol's reward function directly incentivizes stake pooling to maximize yield, making entities like Lido and Coinbase dominant. This is not a failure of execution but a predictable outcome of the incentive model.
solana-and-the-rise-of-high-performance-chains
Blog
Why Validator Cartels Are a Feature, Not a Bug
An analysis of how the economic incentives of modern Proof-of-Stake, particularly on high-throughput chains like Solana, logically produce coordinated validator groups. This is not a failure of decentralization but a predictable feature of capital efficiency and MEV optimization.
introduction
THE INCENTIVE REALITY
Introduction: The Cartel Conundrum
The economic design of Proof-of-Stake networks structurally incentivizes validator centralization, creating a persistent security trade-off.
Decentralization is a cost center. Solo staking requires capital lockup, technical overhead, and constant uptime. Professionalized operations like Figment and Chorus One achieve economies of scale that individual users cannot match, centralizing block production.
The trade-off is security for liveness. A highly concentrated validator set, as seen in BNB Chain or early Solana, optimizes for network performance and finality. The security risk shifts from 51% attacks to regulatory capture or coordinated social attacks.
Evidence: Lido commands over 32% of Ethereum's staked ETH. This creates a systemic risk where a single entity's governance failure or slashing event could destabilize the chain's consensus.
key-trends
WHY CARTELS ARE INEVITABLE
The Three Pillars of Cartel Formation
Decentralization is a spectrum, and economic incentives naturally concentrate power into stable, high-performing coalitions.
01
The Problem: The Solo Staker's Dilemma
Individual validators face prohibitive capital requirements and operational risk. The result is a security vs. decentralization trade-off that pushes stake towards professional pools.
- 32 ETH minimum stake creates a $100k+ barrier to entry.
- ~99.9% uptime requirement demands enterprise-grade infrastructure.
- Slashing risk is catastrophic for small operators, leading to risk-averse delegation.
32 ETH
Barrier
99.9%
Uptime Req
02
The Solution: Professionalized Pooling (Lido, Rocket Pool)
Staking-as-a-Service providers aggregate capital and expertise, creating economies of scale that solo stakers cannot match. This isn't a bug; it's the market's efficiency solution.
- $30B+ TVL in liquid staking tokens demonstrates overwhelming demand.
- ~5-10% commission rates professionalize network security.
- MEV smoothing and slashing insurance are only viable at scale.
$30B+
Aggregated TVL
5-10%
Commission
03
The Outcome: The Cartel Equilibrium
Stable coalitions emerge because they maximize extractable value and minimize systemic risk. The network prefers predictable, well-capitalized validators over fragile decentralization.
- Top 3 entities often control >33% of stake in major PoS chains.
- Cartels enable inter-validator trust for fast, cheap cross-shard communication.
- The real threat isn't formation, but cartel collusion against the chain itself—a solved problem via governance slashing.
>33%
Stake Control
Fast
Cross-Shard Comms
deep-dive
THE INCENTIVE
The Inevitability Thesis: Game Theory in Action
Economic incentives guarantee the formation of validator cartels, making them a predictable system outcome rather than a failure.
Cartel formation is inevitable. The profit-maximizing strategy for any rational validator is to join a staking pool or delegation service like Lido or Rocket Pool. This centralizes voting power, but the protocol's reward structure makes it the dominant equilibrium.
Decentralization is a marketing term. The Nakamoto Coefficient is a lagging indicator. Real-world systems like Ethereum and Solana demonstrate that capital consolidates to minimize variance and operational overhead, creating a few dominant players.
Protocols bake this in. Ethereum's proposer-builder separation (PBS) and MEV-Boost explicitly acknowledge and manage this reality by creating a market for block space, separating the economic power of builders from the consensus role of validators.
Evidence: Lido commands over 32% of Ethereum's staked ETH. This isn't an attack; it's the system working as designed, where economies of scale create a stable, albeit centralized, staking layer.
COORDINATION AS A PROTOCOL PRIMITIVE
Cartel Mechanics: A Comparative Lens
Comparing how different consensus and staking models structurally enable or resist validator cartels, analyzing the trade-offs for network security and decentralization.
| Mechanism / Metric | Proof-of-Stake (Generic) | Delegated Proof-of-Stake (e.g., Cosmos) | Ethereum Proof-of-Stake (with PBS) |
|---|---|---|---|
Minimum Cartel Size for 33% Liveness Attack | 33% of total stake | ~5-10 entities (via delegation) | 33% of total stake |
Minimum Cartel Size for 51% Finality Attack | 51% of total stake | ~10-20 entities (via delegation) | 66% of total stake |
Native Slashing for Cartel Behavior | |||
Proposer-Builder Separation (PBS) Enabled | |||
Cartel Profit Extraction Vector | MEV searcher bribes, transaction censorship | High inflation/staking rewards, chain governance control | Block building market dominance (e.g., via mev-boost relays) |
Barrier to Cartel Formation (Nakamoto Coefficient) | High (100s-1000s of nodes) | Low (10s of validators) | Medium-High (Core client diversity, ~4-5 major entities) |
Time to Detect/Respond to Cartel | Epochs to weeks (slow social consensus) | Governance vote (weeks) | Within an epoch (automated slashing, fork choice rule) |
counter-argument
THE INCENTIVE REALITY
Refuting the 'Decentralization Purist'
Validator cartels are an inevitable economic equilibrium that, when properly structured, enhance network security and efficiency.
Cartels are inevitable. In any Proof-of-Stake system, capital seeks the highest risk-adjusted return, leading to stake concentration in professional operators like Figment or Chorus One. This is a market outcome, not a design failure.
Cartels provide stability. A known, accountable entity like Lido or Coinbase is easier to slash, negotiate with, and hold responsible for liveness failures than a diffuse, anonymous global set. This reduces systemic coordination risk.
The threat is misaligned incentives, not centralization. The real failure mode is when cartels control ancillary revenue streams like MEV, creating a toxic extractive layer. Solutions like MEV-Boost and SUAVE aim to separate block building from proposing.
Evidence: Ethereum's post-Merge security budget relies on this model. Over 60% of staked ETH is delegated to a handful of providers, yet slashing events are near-zero because their economic stake is transparent and targetable.
takeaways
VALIDATOR CARTELS
Key Takeaways for Builders and Investors
The concentration of stake is an economic inevitability, not a design failure. The real innovation is in managing its risks and leveraging its benefits.
01
The Problem: Liveness Over Security
Decentralization is a spectrum, not a binary. A ~33% cartel can't steal funds but can halt the chain, creating a liveness failure. This is a feature: it forces economic negotiation and external governance (like social consensus) to resolve deadlocks, as seen in Ethereum's DAO fork and Solana's restart events.
- Key Benefit: Separates safety (immutability) from liveness (availability), allowing for pragmatic recovery.
- Key Benefit: Creates a clear, high-cost attack vector that is economically irrational to execute.
~33%
Liveness Attack
>66%
Safety Attack
02
The Solution: Economic Disincentives, Not Perfect Distribution
Protocols like Ethereum (slashing, inactivity leak) and Solana (high hardware costs) don't prevent cartels; they make them expensive to misbehave. The goal is to align cartel profit with network health. Cosmos' interchain security and EigenLayer's restaking formalize this, allowing cartels (as professional operators) to sell security as a service.
- Key Benefit: Professional validators with $1B+ at stake have more to lose from attacks than to gain.
- Key Benefit: Enables capital-efficient security models for new chains and AVSs.
$1B+
Stake at Risk
-100%
Slash Penalty
03
The Reality: Cartels Enable Performance
High-throughput chains (Solana, Sui, Aptos) require professional, coordinated validator sets with enterprise-grade hardware. This "cartel" is a prerequisite for ~50k TPS and ~400ms finality. The trade-off is accepted for performance-critical applications (e.g., centralized exchange matching engines, high-frequency DeFi).
- Key Benefit: Enables sub-second finality and scalable throughput impossible with a globally distributed, amateur validator set.
- Key Benefit: Creates a clear market for high-end infrastructure and professional DevOps.
~50k
Peak TPS
~400ms
Time to Finality
04
The Investment Thesis: Stake Aggregation Platforms
The real value accrual is in layers that aggregate and coordinate stake capital. Lido, Rocket Pool, EigenLayer, and Babylon are not just middleware; they are the new cartel factories. They abstract stake management for users and provide pooled security for operators. Investment should focus on protocols that capture the fee flow from this essential service.
- Key Benefit: Captures the management fee on tens of billions in staked assets.
- Key Benefit: Becomes the default security backbone for emerging L2s and modular chains.
$30B+
TVL Managed
5-10%
Fee Revenue
ENQUIRY
Get In Touch
today.
Our experts will offer a free quote and a 30min call to discuss your project.
NDA Protected
Confidentiality24h Response
Time to ValueDirectly to Engineering Team
No Sales Fluff10+
Protocols Shipped
$20M+
TVL Overall