Why Delegation Creates Moral Hazard in Network Security

Capital naturally pools with the largest, most reliable validators, creating systemic risk. A single client bug or slashing event in a major pool like Lido or Coinbase can cascade.

• Lido commands ~32% of Ethereum stake, nearing the 33% 'soft' security threshold.
• Top 3 pools control >50% of stake on many Cosmos chains, enabling cartel behavior.
• Slashing penalties are socialized across thousands of delegators, diluting accountability.

Delegators optimize for APY, not validator resilience, creating a moral hazard. Validators compete on fee cuts and rebates, not infrastructure quality.

• Delegators flock to 0% commission validators running on cheap, centralized cloud providers (AWS, GCP).
• This creates geographic and provider centralization, a single point of failure for network liveness.
• The security budget (staking rewards) is diverted from professional node operators to yield farmers.

Delegated Proof-of-Stake (DPoS) and Liquid Staking Tokens (LSTs) prioritize speed and liquidity at the cost of Byzantine fault tolerance.

• Fast finality in chains like BNB Chain or Solana relies on a small, known set of professional validators, sacrificing decentralization.
• Liquid staking derivatives (stETH, stSOL) add a financialization layer, creating secondary market risks disconnected from underlying validator performance.
• True security requires a large, diverse, and actively participating validator set, which delegation inherently undermines.

Formalizes the security marketplace by allowing ETH stakers to delegate stake to actively validated services (AVSs), aligning incentives with cryptoeconomic security.

• EigenLayer creates a market for pooled security, letting stakers opt-in to secure new protocols (oracles, bridges).
• Introduces slashing for liveness and correctness faults beyond the base chain, making delegation a conscious risk/reward decision.
• Forces AVS operators to compete on security proofs and reliability, not just fee discounts.

Protocol-level mechanisms to enforce decentralization by capping validator influence and requiring meaningful skin-in-the-game.

• Cosmos' quadratic voting for governance reduces whale power but doesn't solve stake concentration.
• Solana's concept of stake-weighted QoS penalizes oversized validators on network performance.
• The only real fix: hard caps on validator stake or enshrined, algorithmically enforced delegation limits.

Shifts delegation from a passive yield instrument to an active security choice by exposing validator metadata and performance metrics.

• Platforms like Chorus One and Figment provide transparency on infrastructure, geography, and client diversity.
• Staking rewards could be tiered based on a validator's contribution to network resilience (e.g., running minority clients, geographic distribution).
• Makes the trilemma explicit: delegators choose between max yield (risky), max security (lower yield), or a balanced middle.

Token holders (principals) delegate to validators (agents) who face different risk/reward incentives. This misalignment creates security gaps.

• Key Risk: Agents optimize for yield via MEV extraction or risky restaking, while principals bear slashing risk.
• Key Metric: On Ethereum, >99% of staked ETH is delegated, concentrating power in ~30 major node operators.

Liquid staking tokens (LSTs) like Lido's stETH exacerbate moral hazard by making stake fungible and tradeable.

• Key Risk: Delegators can exit their security commitment instantly via secondary markets, undermining the "skin in the game" premise.
• Entity Example: Lido controls ~32% of Ethereum validators, creating a systemic centralization risk for the chain's consensus.

The threat of slashing fails when costs are socialized across thousands of delegators and operators are under-collateralized.

• Key Risk: A major operator failure (e.g., Figment, Coinbase) could trigger mass slashing for passive delegators, causing governance crises and chain forks.
• Reality Check: Historical slashing events (e.g., on Cosmos) have led to hard forks to reverse penalties, proving the threat is not credible.

Protocols must mandate that node operators post a bond directly slashed for their specific faults, moving beyond token-weighted voting.

• Key Benefit: Aligns risk by making operators' capital first-loss, similar to MakerDAO's PSM design or EigenLayer's operator staking.
• Mechanism: Implement fault proofs that trigger operator-specific slashing before delegator funds are touched.

Hard protocol-level caps on a single operator's share and enforced validator set rotation reduce centralization risk.

• Key Benefit: Prevents the rise of "too-big-to-fail" entities like Lido or Coinbase.
• Precedent: Cosmos Hub's 14% validator cap and Solana's leader rotation schedule are partial implementations of this principle.

Replace passive delegation with active, reward-at-risk mechanisms where delegators choose specific operators and share in their penalties.

• Key Benefit: Forces due diligence and creates a market for operator reputation, akin to insurance underwriting.
• Framework: Obol Network's Distributed Validator Technology (DVT) and SSV Network's operator grading move in this direction by technically decentralizing operator responsibility.