LlamaRisk’s Insights: The Pectra Upgrade
The Ethereum Pectra Upgrade (scheduled for May 7, 2025) introduces substantial changes to staking mechanics and the risk landscape for liquid staking (LST) and liquid restaking (LRT) protocols. Here are the key takeaways:
- Validator Consolidation & Slashing Risks: EIP-7251 raises the maximum validator balance to 2048 ETH, allowing LST providers to consolidate validators and reduce operational overhead. However, this amplifies risk—if a large validator is slashed, the loss (and impact on LST value) can be up to 64 times greater than with a 32 ETH validator. Correlated slashing among fewer, larger validators (due to infrastructure or software failures) could further magnify losses, making client and operator diversity even more critical. The initial slashing penalty is also reduced to 1/4096 of a validator’s effective balance, lessening the immediate penalty.
- Adoption Pace & Monitoring: Lido (stETH) is taking a cautious approach (see LIP 27), prioritizing compatibility over new features post-upgrade. Other LST/LRT providers may move faster to adopt Pectra’s capabilities. Monitoring protocol updates, validator strategies (especially adoption of 0x02-type credentials), and contract audits across all LST/LRT collateral is essential to understanding evolving risk profiles.
- Restaking and Dual Slashing Exposure: Pectra changes slashing mechanics at the consensus layer, while the launch of EigenLayer’s AVS slashing (April 17, 2025) introduces a second, AVS-specific slashing layer for LRTs. EigenLayer allows AVSs to set custom slashing conditions and only target the stake allocated to each AVS, increasing flexibility but requiring vigilant risk management.
- Operational Improvements: EIP-7002 enables execution-layer-triggered (smart contract) withdrawals, allowing LST/LRT protocols to automate validator exits and reduce reliance on permissioned operators. If implemented robustly, this reduces operational risk and supports safer, more transparent staking. Aave and similar integrators should encourage the rapid adoption of EIP-7002. Despite upgrades like Dencun (EIP-4788), most LST/LRT protocols still depend on legacy oracles—adopting EIP-7002 moves the ecosystem toward on-chain proofs and better security.
- L2 and Infrastructure Benefits: For Layer 2s, Pectra introduces improvements such as extended blob capacities and new cryptographic precompiles, helping to optimize data costs and reduce gas fees.
Below, we delve into the specifics and provide a checklist to monitor how key LST and LRT providers navigate the Pectra upgrade.
Slashing (Pre-Pectra)
To understand how the Pectra upgrade impacts slashing, it is important first to clarify how slashing currently works for validators under the existing rules. The trigger conditions are:
- Double Proposing: Proposing two different blocks for the same slot.
- Double Signing: Signing two different attestations for the same target epoch.
- Surround Voting: Casting an attestation vote that “surrounds” or is surrounded by a previous vote from the same validator.
Penalty
The detection and reporting are done by another validator, including proof in a block. The offending validator immediately slashed a small amount of 1 ETH (1/32 of effective balance) called “Initial Penalty.” This makes it costly for any reason for validators to self-slash. Along with the initial penalty, the validator is queued for a forced exit from the active validator, and the slashed validators face an extended withdrawal delay (currently 36 days) before their remaining balance post penalties becomes withdrawable.
Correlation Penalty is applied on day 18, halfway through the forced exit period. This penalty scales with the total staked ether of all slashed validators 18 days before and after the slashing event, meaning when more validators are slashed simultaneously over 36 days, the penalty can be up to the validator’s entire effective balance, i.e., 32 ETH. It discourages large-scale, coordinated attacks.
Impact on Liquid Staking
When underlying validators managed by the LST provider are slashed, the total ETH backing the LST decreases. This directly reduces the LST’s intrinsic value (e.g., the stETH: ETH exchange rate might worsen slightly beyond normal reward accrual/redemption effects). If the value drops significantly (due to direct loss or depegging), it can push borrower positions below their health factor threshold, triggering liquidations. Correlated slashing poses the biggest threat to Aave’s LST markets.
LRTs are subject to dual slashing risk: consensus layer slashing from the underlying ETH LST and AVS slashing to be imposed after April 17, 2025, by EigenLayer, the infrastructure enabling restaking and AVSs.
Pectra Upgrade Changes
The Ethereum Pectra Upgrade, scheduled for launch on May 7, 2025, introduces improvements to the Execution Layer (Prague) and the Consensus Layer (Electra). It introduces significant changes to Ethereum’s staking mechanics, primarily through EIP-7251 (Increase the max effective balance), EIP-6110 (Supply validator deposits on-chain), and EIP-7002 (Execution-Layer triggerable withdrawals).
EIP-7251
Current MAX_EFFECTIVE_BALANCE limits the stake of a single validator to 32 ETH, causing an increase in the validators participating in the consensus layer. This leads to “redundant validators” controlled by a single entity. With EIP-7251, MAX_EFFECTIVE_BALANCE will be increased to 2048 ETH (when upgraded to 0x02-type withdrawal credential from 0x00 & 0x01-type), and a MIN_ACTIVATION_BALANCE of 32 ETH will be created, meaning the minimum ETH to become a validator remains unchanged. Rewards still accrue proportionally, but validators can consolidate stake into fewer validator instances. Opting into this feature is not mandatory. To further encourage the consolidation, the initial slashing penalty has been reduced from 1/32 of the validator’s effective balance to 1/4096, meaning the initial penalty for a slashed 32 ETH validator is now roughly 0.008 ETH.
Impact
It aims to reduce validator set size, and since fewer active validators are needed, it will ease the network load. Large staking pools like LST providers and exchanges can manage fewer validator keys/instances, thus simplifying operations. With the initial penalty almost negligible, the overall risk for performing validator duties decreases. However, it increases the amount of stake controlled by a consolidated validator (holding 2048 ETH), who, if were to get slashed, will have a higher ETH loss from that single instance than from a 32 ETH instance.
EIP-6110
Removes Eth1Data voting to move validator deposit processing from the Consensus Layer to the Execution Layer, simplifying the process, enhancing deposit security, and enabling newly deposited validators to activate faster.
Impact
Improves overall staking UX.
EIP-7002
Allows validator exits to be initiated from an Execution Layer address specified during deposit (the withdrawal_credentials), which can be the EOA or smart contract (staking pool or EigenPod) where a validator’s exited/withdrawn balance is sent. Exits require a signed message from the validator key broadcast on the Consensus Layer p2p network.
Impact
It reduces the trust assumptions in all delegated staking setups where instead of relying on underlying permissioned node operators, the staking pools and LST protocols can trigger exits via smart contracts without needing direct access to or cooperation from potentially thousands of underlying validator keys. It enables automated exits based on performance metrics or user requests managed entirely by smart contracts. Additionally, LRT providers can leverage this to manage L1 validators based on their AVS performance or penalties.
Post-Pectra Liquid Staking
Post EIP-7251 is implemented, LST providers may consolidate stakes, potentially reducing their operational overhead. The impact on risk depends on implementation: isolated slashing events will result in a lower relative loss (as the initial penalty becomes negligible), but correlation penalties could become significantly more severe, as the simultaneous slashing of even a few large 2048 ETH validators would contribute massively to the penalty calculation for all involved. Risk profile differentiation shifts slightly based on how providers adapt. Fewer validators mean fewer nodes susceptible to a widespread client bug simultaneously, but each affected validator represents a larger chunk of stake. The net effect depends on client diversity and operational practices post-upgrade.
EIP-7002 is highly beneficial as it allows LST protocols to build more robust, automated systems for managing validator lifecycles, including potentially auto-exiting underperforming or unresponsive validators via smart contracts. This can reduce operational risk and improve responsiveness to issues, potentially making LSTs safer.
Lido plans to implement minimal changes to keep the protocol functioning correctly after the Pectra upgrade discussed here in LIP 27:
- The initial slashing penalty is removed from the CSVerifier contract, along with updated gIndexes and revised validator churn parameters. Losses from initial slashing will be accounted for when the validator’s full withdrawal is reported.
- The Oracle consensus version is being upgraded to support new deposit queues and dynamic validator balances.
- Interim safeguards are also being introduced, such as the ability to pause deposits if necessary and two consecutive on-chain votes to help maintain protocol stability during the hard fork transition.
As part of the Pectra upgrade, the updated CSVerifier contract has been audited by Ackee and MixBytes. The off-chain Lido Oracle components, modified in line with LIP-27, have undergone audits by MixBytes and Composable Security. The advanced functionalities outlined in EIP-7251 (higher maximum effective balance) and EIP-7002 (manual withdrawal triggers) will be considered at a later stage.
Delegate Checklist for Safe Pectra Adoption
This checklist can be used to track how key LST and LRT providers are navigating the Pectra upgrade, ensuring operational smoothness and identifying potential shifts in risk profiles relevant to Aave collateral:
- Pectra-related rollout plans from LST/LRT providers clearly stating their specific timeline and strategy for adopting Pectra features (especially EIP-7251 & EIP-7002).
- Watch for announcements of stake consolidation from LST providers and their approach to managing the associated client diversity.
- Assess changes to smart contracts and ensure they are audited, since implementing the upgrade will require modifying existing code logic, for example, Lido already had their updated contracts audited in preparation for the upgrade.
- Identify adoption of automated exits (EIP-7002) to facilitate smart contract-based validator exits. This will generally reduce staking risk as reliance on the validator is reduced for withdrawals.
- Monitor for Pectra-related operational issues, which include providers reporting any unexpected validator behavior, deposit/withdrawal issues, or Oracle discrepancies.
Disclaimer
This review was independently prepared by LlamaRisk, a community-led decentralized organization funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.
The information provided should not be construed as legal, financial, tax, or professional advice.