Why Staking Pools Are Recreating the Banking System

Lido, Rocket Pool, and Coinbase have created a new class of yield-bearing assets that concentrate validator power. This recreates the 'too big to fail' dynamic of systemically important banks.

• Lido alone commands ~30% of all Ethereum validators, creating a critical centralization vector.
• The $40B+ LSD market creates a winner-take-most flywheel where liquidity begets more stake.
• Users trade sovereignty for convenience, mirroring the deposit-gathering model of commercial banks.

Staked ETH is no longer a locked, inert asset. Protocols like EigenLayer enable its "restaking" to secure other networks, creating a complex web of interconnected risk.

• This is the crypto equivalent of fractional reserve banking, where the same capital is pledged multiple times.
• Creates systemic contagion risk—a slashing event on an AVS could cascade through the restaking ecosystem.
• $15B+ is already restaked, building a highly leveraged and opaque financial layer.

Staking pools don't just earn base rewards; they capture and privatize Maximal Extractable Value (MEV). This creates a closed-loop economy where the largest validators extract the most value.

• Pools like Lido and Coinbase run proprietary MEV-Boost relays, controlling the flow of profitable transactions.
• This leads to MEV centralization, where a handful of entities capture the majority of arbitrage and liquidation profits.
• The result is a two-tiered system: insiders with advanced MEV tooling, and everyone else.

A handful of large staking pools control the majority of stake on major networks, creating a permissioned set of validators.\n- Lido, Coinbase, Binance control >60% of Ethereum's beacon chain stake.\n- This recreates the "too big to fail" dynamic, where protocol security depends on a few corporate entities.\n- The network's liveness and censorship resistance are now a function of their operational integrity.

Staking derivatives like stETH and cbETH create a shadow banking system of rehypothecated assets.\n- $30B+ in staked ETH is represented by liquid staking tokens (LSTs).\n- These LSTs are used as collateral across Aave, MakerDAO, and EigenLayer, creating complex, hidden leverage.\n- A depeg or smart contract failure in one pool can trigger cascading liquidations across DeFi.

Users delegate keys and funds to opaque pool operators, trading self-custody for yield.\n- Most users cannot audit the slashing protection or key management practices of their chosen pool.\n- This reintroduces counterparty risk and custodial risk, the very problems crypto aimed to solve.\n- Regulatory capture becomes trivial when enforcement targets a few large, licensed entities.

Staking pools capture and centralize MEV and block rewards, becoming rent-seeking intermediaries.\n- Pools like Lido use MEV-Boost to capture ~90% of maximal extractable value from their blocks.\n- They distribute a fraction as "rewards," skimming the rest as profit—a direct analog to bank fees.\n- This stifles innovation and creates misaligned incentives between the pool and the underlying chain.

Staking pools like Lido and Rocket Pool abstract validator complexity but concentrate stake, recreating a system of trusted custodians. The top 5 pools control >60% of Ethereum's stake, creating systemic risk and governance capture vectors.

• Key Benefit 1: Lowers entry barrier for retail stakers.
• Key Benefit 2: Introduces a new, dominant financial intermediary layer.

Liquid Staking Tokens (LSTs) like stETH are not just receipts; they are the foundation of a new shadow banking system. They become the preferred collateral in DeFi (e.g., Aave, MakerDAO), creating a hierarchy where pooled stakers are the primary liquidity providers for the entire ecosystem.

• Key Benefit 1: Unlocks capital efficiency for stakers.
• Key Benefit 2: Concentrates systemic risk in LST-based collateral loops.

Pools must now manage treasury risk, regulatory exposure, and governance attacks—core functions of a financial institution. This distracts from protocol development and creates a target for enforcement, as seen with the SEC's scrutiny of Kraken and Coinbase staking services.

• Key Benefit 1: Creates a sustainable fee-based business model.
• Key Benefit 2: Forces protocol teams to become compliance and risk managers.

Proof-of-Stake security relies on decentralized validator sets. Large pools, through techniques like Distributed Validator Technology (DVT), can appear decentralized while effectively operating as a cartel. This risks censorship and chain re-orgs, undermining the base layer's credibly neutral properties.

• Key Benefit 1: Improves validator resilience and uptime.
• Key Benefit 2: Obfuscates the true locus of control and coordination.

The response to pool centralization—restaking via EigenLayer and LST of LSTs—adds layers of financial abstraction and interconnected risk. This creates a complex, opaque dependency graph where a failure in one pooled staking layer cascades through the restaking and DeFi ecosystem.

• Key Benefit 1: Bootstraps security for new protocols.
• Key Benefit 2: Exponentially increases tail risk and contagion vectors.

The only antidote is making solo staking trivial. Solutions like DVT clusters (Obol, SSV) and one-click home staking (Dappnode) must succeed. The goal is to make running a validator as easy as using a pool, breaking the economic incentive for centralization at the source.

• Key Benefit 1: Preserves base layer decentralization and security.
• Key Benefit 2: Eliminates intermediary rent extraction and systemic points of failure.