International Association
for Cryptologic Research

Proof-of-stake systems require stakers to lock up their funds in order to participate in consensus validation. This leads to capital inefficiency, as locked capital cannot be invested in Decentralized Finance (DeFi). Liquid staking rewards stakers with fungible tokens in return for staking their assets. These fungible tokens can in turn be reused in the DeFi economy. However, liquid staking introduces unexpected risks, as all delegated stake is now fungible. This exacerbates the already existing Principal–Agent problem faced during any delegation, in which the interests of the delegator (the Principal) are not aligned with the interests of the validator (the Agent). In this paper, we study the Principal–Agent problem in the context of liquid staking. We highlight the dilemma between the choice of proportional representation (having one's stake delegated to one's validator of choice) and fair punishment (being economically affected only when one's choice is misinformed). We put forth an attack illustrating that these two notions are fundamentally incompatible in an adversarial setting. We then describe the mechanism of exempt delegations, used by some staking systems today, and devise a precise formula for quantifying the correct choice of exempt delegation which allows balancing the two conflicting virtues in the rational model.