Most observers predict an inevitable consolidation and centralisation of stake pools on Solana. A recent report by Delphi Digital writes:
Over time, we would expect a winner-take-most outcome with a few protocols obtaining all of the liquidity. There is a significant flywheel effect as liquidity compounds for these protocols as they become more integrated (“lego-fied”) in the ecosystem and are used as intertwined blocks. Once protocols start composing with and building on top of each other it is nearly impossible to remove the glue.
It’s easy to see where this prediction comes from — one only needs to look across the pond. Lido enjoys a near-monopoly on staked ETH.
Is a winner-take-most outcome truly inevitable? Is it good? Can we do anything about it?
Economics 101: monopolies are bad for the consumer, but very good for the monopolist. Lido enjoys strong monopoly power in Ethereum, and charges a eye-popping 10% fee as a result.
Should the users of Ethereum pay 10% of all economic activity to Lido? Has this been good for the ecosystem and the users of Ethereum?
Contrast this with Solana. Solana started off with three stake pools (Marinade, Socean, and Lido), with more launching over the months. Intense competition has driven fees down to 2% — one-fifth the fees on Ethereum.
Strong competition and lower fees are undoubtedly good for consumers. But what if consolidation is inevitable? A16z certainly think so. That’s why they gave 70 million dollars to Lido — they want in on those juicy, monopoly-powered fees.
If consolidation is inevitable, then the large stake pools will get larger. Their enormous TVL means that existing and upcoming DeFi platforms integrate them first. They use their power to negotiate exclusivity deals, locking out upstart stake pools. We’ll see individual stake pools go defunct or merge into the largest incumbents, like flowers withering on the vine.
And when the largest incumbents have established an effective monopoly... then the squeeze will come. Fees will ratchet up — after all, where are stakers going to go?
Higher fees are only the tip of the iceberg when it comes to the dangers of consolidation. Consolidation also threatens decentralisation, freedom, and flexibility. For example, Lido forces validators to charge a 10% fee (so as not to undercut their own large validators), removing any freedom validators have to set their own fees. Additionally, Lido uses its market power to drive stake to only a certain whitelist of validators—enriching itself and its cabal of validators, while blocking new validators from entering the space.
We’ve seen this playbook play out again, and again — in TradFi, in Ethereum, and now Solana. The end result is higher prices for consumers, less autonomy for validators, and a stake pool on top—like an engorged parasite—leeching off the economic activity of all staked SOL.