The Skin In The Game Staking Paradox

Validators having skin in the game increases proof of stake network security. That’s a common reason given to justify today’s staking economics. These are the same economics that encourage a rich-get-richer scenario.

Some Skin Secures the Network

This reasoning may hold true to a point. Yet it breaks down after that. Having too much skin in the game actually makes staking networks less secure.

If validators have nothing to lose, there’s little motivation to spend money securing their systems. So to an extent, having skin in the game encourages validators to protect their skin. More secure validators result in more secure networks.

Too Much Skin Compromises the Network

Yet having too much skin in the game becomes problematic. It actually introduces a security risk. This happens when a small number of validators have enough skin in the game to control the network.

Depending on the network, a small group holding between 34% and 51% of total stake gives that group various levels of control over the network. This begins centralizing control of what’s intended to be a decentralized network.

Current staking economics incentivize this behavior. I wrote about this incentivization here. Furthermore, validators driven first by financial interests are not motivated to prevent this.

Most of the larger earlier validators seem to be driven primarily by financial motivations. If they’re trying to maximize their return on investment, why wouldn’t they try and accumulate as much stake as possible? Once exchanges begin validating, this likelihood will only increase.

That's the Paradox

It’s this paradox that leads me to believe the skin in the game defense of current staking economics breaks down. What’s intended to increase network security actually introduces a significant security risk.