Why Shared Security Models Inevitably Lead to Rent Extraction

Security is not a commodity. Protocols like EigenLayer and Babylon sell security as a fungible resource, but validator trust and slashing conditions are inherently non-fungible and application-specific.

The marketplace centralizes risk. Aggregating thousands of Actively Validated Services (AVSs) onto a single set of operators creates systemic, correlated failure points, contradicting decentralization goals.

Economic models extract value. The restaking yield is rent paid by AVSs for diluted, non-dedicated security, a worse product than a dedicated validator set.

Evidence: The slashing risk for an AVS like EigenDA is negligible versus its staked ETH value, creating a massive subsidy from the Ethereum validator set.

Economic gravity centralizes staking. Delegated Proof-of-Stake (DPoS) and liquid staking derivatives (LSDs) like Lido and Rocket Pool create a winner-take-most market. Capital efficiency demands delegation to the largest, most reliable operators, creating systemic risk and fee extraction layers.

Sequencer markets follow the same pattern. Optimistic and ZK-rollups initially decentralize execution, but their shared sequencer sets (e.g., Espresso, Astria) will consolidate. High-throughput, low-latency block building is a commoditized service where scale and MEV capture determine the winner.

The endpoint is a regulated utility. The final form of a shared security provider is a licensed financial infrastructure business. Entities like Figment or Coinbase Cloud will dominate by offering compliance, insurance, and enterprise SLAs, extracting rent for 'security-as-a-service'.

Evidence: Lido's >30% Ethereum stake. This dominance creates a protocol risk threshold that new stakers cannot compete with on cost, forcing further centralization. The economic design of shared security guarantees this outcome.

Shared security creates oligopolies. Protocols like Lido (stETH) and EigenLayer (restaking) concentrate economic power in a few node operators to achieve credible neutrality. This concentration is a feature, not a bug, for initial adoption but establishes a cartel that controls pricing and access.

Rent extraction is the logical endpoint. The capital efficiency of pooled security creates a winner-take-most market. Operators like Figment and Kiln, who dominate both Lido and EigenLayer, can dictate fees and protocol inclusion, turning a public good into a private toll booth.

The data proves centralization. Over 32% of all staked ETH is controlled by Lido, and its top 5 node operators command a majority of that stake. This voting bloc can influence governance across DeFi, from Aave to Uniswap, creating systemic risk.

The counter-argument of slashing fails. Slashing mechanisms punish individual operator misbehavior but do not deter cartel collusion. A dominant group can collectively raise fees or censor transactions without triggering a slashing penalty, extracting rent passively.

The provider becomes a monopolist. A shared security provider, like a major L1 or an EigenLayer AVS, controls a critical resource. This creates a classic platform dynamic where the provider can dictate terms and raise prices after applications achieve lock-in.

Revenue capture is asymmetric. The security provider's revenue is a direct tax on the economic activity of the applications, like rollup sequencer fees on Arbitrum or Optimism. The provider's incentive is to maximize this tax, not the application's success.

Applications face commoditization. On a shared security layer, applications compete on an identical cost basis. This erodes differentiation and forces competition on thin margins, while the security provider's margin remains protected.

Evidence: The Celestia vs. Ethereum DA fee war demonstrates this. Rollups using Celestia pay ~$0.01 per MB for data availability, creating direct cost pressure on Ethereum's ~$100+ per MB blob fees, proving the extractive potential of the incumbent.

Security is a commodity that providers will bundle with proprietary services to create lock-in. The Cosmos Hub's Interchain Security model demonstrates this, where the ATOM token's value accrual is tied to selling its security to consumer chains, creating a clear revenue stream for the hub at the expense of sovereign economics.

Economic gravity centralizes validation power. A dominant provider like EigenLayer attracts the most stake, creating a re-staking monopoly that dictates pricing and slashing terms. Competing providers cannot offer cheaper security without a comparable stake pool, leading to an oligopoly.

The 'public good' fails because the provider's profit motive directly conflicts with the rollup's need for cheap, neutral security. This is identical to the AWS cloud model, where initial discounts evolve into inescapable, high-margin infrastructure bills as migration costs become prohibitive.

Evidence: In Cosmos, the Neutron chain pays ~$1M annually in ATOM inflation to the hub's validators for security. This is pure rent extraction, as Neutron's own token holders derive no governance rights or fee revenue from this mandatory payment.

Security as a rent-extracting service is the endgame for monolithic L1s and shared sequencers. The provider controls the core economic engine, forcing applications to pay recurring fees for a bundled product they cannot customize or fork.

Application-specific chains fragment as a direct response to this rent extraction. Projects like dYdX and Aevo migrate from L2s to their own stacks to capture MEV, control upgrades, and own their user relationships.

The L2/L3 narrative accelerates fragmentation. Arbitrum Orbit, OP Stack, and Polygon CDK are franchise models that monetize security while offloading execution complexity, creating a landscape of interoperable but isolated fiefdoms.

Evidence: Ethereum's dominance as a settlement layer proves the model. L2s pay ~1,000 ETH daily in sequencing fees and bridge costs to Ethereum validators, a pure rent for security that application chains now seek to avoid.