Hey @Cosmic_Validator @CML @Sumit_Redhu,
My apologies that the Validator Liquid Staking Cap hasn’t been formally defined or discussed. Let me quickly describe the reasoning behind it.
The Validator Liquid Staking Cap is the share of each validator’s total delegated ATOM that can be provided by one or more liquid staking provider(s). For example, if the parameter is set at 80% and a given validator already receives 80% of its ATOM from either LSM tokenized shares or interchain accounts (ICAs) - then Cosmos Hub prevents further LSM tokenizations and ICA delegations to that validator. If the parameter is set at 100% then validators can receive an unlimited amount of liquid staking provider delegations from ICAs, as they can today.
The Validator Liquid Staking Cap is a safety feature introduced to remove the hypothetical attack scenario where a validator spins up a Cosmos Hub node and delegates everything to that node to attempt an attack on liquidstakedATOM holders.
The attack works like this: a malicious validator could attack liquidstakedATOM holders by liquid staking ATOM to their own validator node, then incurring downtime to slash those delegations made to their own node. Those delegations are entirely liquid staked, so holders of liquidstakedATOM would bear the slash penalty.
This safety parameter demands that the malicious validator must attract non-liquid-staked ATOM in order to accept liquid staked ATOM. This would render the attack difficult, even if the parameter were set to a high value (e.g. 90%).
This feature supplements the validator bond factor to protect stToken holders from slashes and the Cosmos Hub from attacks. One way the validator liquid staking cap could be raised in the future (if it’s not initially set to 100%) without loss of security is by slashing validator bond at a higher rate than standard stake.
Thankfully, the attack vector that the Validator Liquid Staking Cap prevents against is fairly unlikely, and this parameter is fully in control of Cosmos Hub governance. So governance can choose to set the parameter to 100%, effectively turning off the parameter. I would recommend that when the liquid staking module upgrade goes live, a governance proposal be introduced to set the parameter to 100%.