Addressing centralization concerns in liquid staking — Q&A with Swell

Liquid staking (LST) has emerged as a popular solution for Ethereum users to participate in staking without locking up their Ether ( ETH ) for extended periods. However, concerns have been raised about the potential for liquid staking to centralize power within the Ethereum ecosystem. In this interview, Daniel Dizon, founder of Swell , a noncustodial ETH liquid staking protocol, discusses these concerns and shares his vision for the future of liquid staking on Ethereum.

CT: Liquid staking has been criticized for centralizing power within the Ethereum ecosystem. What are your thoughts on these discussions?

Daniel Dizon: From a network perspective, two fundamental properties make Ethereum valuable — decentralization and security.

When multiple node operators are tied together — either operationally, politically, or through a liquid staking governance token — they are more likely to act as a single entity with outsized influence over Ethereum, threatening the values of these core qualities .

This was first pointed out in Danny Ryan’s seminal paper , pointing out the dangers of “cartelization” and the drastic risks posed by a single dominant liquid staking protocol, and has since been echoed by the likes of Vitalik Buterin, who suggested that any protocol controlling more than 15% of all validators should be limited by social pressure.

Speculative controversial take: we should legitimize price gouging by top stake pool providers. Like, if a stake pool controls > 15%, it should be accepted and even *expected* for the pool to keep increasing its fee rate until it goes back below 15%. https://t.co/cOtuM7Occd

— vitalik.eth (@VitalikButerin) May 14, 2022

CT: To mitigate the risks of centralization, what steps do you think the Ethereum community and stakeholders should take?

DD: The best way to mitigate the risks of centralization is to create a diverse staking market consisting of multiple providers, each with a relatively small share of the market, all competing on a level playing field. The most effective way to achieve this is to offer better deals to liquid stakers.

That’s why we created the Super SwETH Vault , which redirects 100% of Swell DAO commissions to depositors for six months, offering a better deal to SwETH holders and helping to diversify the staking market.

CT: What led you to start Swell, and what challenges did you face in developing a liquid staking protocol?

DD: Swell is relatively late to the liquid staking scene, entering the market more than two years after the first successful liquid staking protocol, Lido , captured the majority of the market share. This could be seen as a problem, as the market can be seen as susceptible to first-mover advantage and winner-takes-most dynamics, where liquidity begets liquidity.

On the other hand, it also means that Swell has been able to learn from the mistakes of its predecessors. We’ve been able to make good design choices from the beginning: choosing a reward token model for fewer tax headaches and easy integration with decentralized finance (DeFi) , focusing on creating the right ecosystem integrations to maximize the utility of our liquid staking token, and designing a simple staking interface that makes the process seamless for newcomers and crypto natives alike.

As a result, we’ve grown rapidly and are now leading the way. Swell quickly broke into the top ten liquid staking protocols on DefiLlama within weeks of launch and has since revealed an upcoming restaking integration with EigenLayer , along with plans for its own liquid restaking token.

Swell extends its capabilities to provide the native crypto liquid restaking experience in DeFi. Source: Swell

CT: How does Swell differentiate itself from other liquid staking protocols on the market?

DD: Swell is liquid staking for DeFi . Swell has built a strong presence in the market by focusing on gamification with the hunting of Pearls and the Swell Voyage and providing economic opportunities through more than 40+ DeFi integrations — accessible from within the app on the newly launched Earn page .

As a result, we’ve built an active and fun-loving community — known as the Aquanauts — that has come together to stake their ETH, boost their yields, and support the security and decentralization of the Ethereum blockchain.

When the token generation event takes place early next year, the introduction of Swellnomics — our tokenomics model — will galvanize the community around Swell even more, turning Swell into a one-stop shop for staking and yield-earning in DeFi.

CT: What steps does Swell take to ensure the security and integrity of the staked assets?

DD: As a liquid staking protocol, we are in the business of issuing receipt tokens for ETH that is staked through our node operators. This makes it essential that Swell prioritizes security at every step of its way.

As such, Swell is audited by the best in the business — Sigma Prime, the same auditor used by the Ethereum Foundation. In addition, we schedule additional audits on a rolling schedule to ensure continuous coverage.

We also use Chainlink’s proof of reserves to help ensure that swETH tokens are fully backed by staked ETH on a 1:1 basis.

Finally, our bug bounty program through Immunefi gives the community the opportunity to identify and share any bugs.

CT: Looking ahead, what is your vision for Swell in the context of Ethereum’s future development?

DD: Since our launch, which flowed off the back of the Shapella upgrade, Swell’s core focus has ultimately been to maximize alignment with Ethereum.

That means supporting permissionlessness, community-driven development, and a diverse liquid staking market. But also, it means creating an LST that maximizes economic freedom for holders by providing unparalleled opportunities in DeFi.

In building the LST for DeFi, we aim to provide access to more economic opportunities in the fun ways only DeFi makes possible — with gamification, community and Pearls!

Equally, as laid out in the Swell City Charter , we’ll be securely exploring the rising tide of restaking and continuing to offer our community members access to great staking opportunities in DeFi.