Everything you need to know about ETH staking with decentralized validation technology

By Adam Efrima

The crypto space is full of buzzwords and acronyms, and today I’m going to talk about one that isn’t as widespread yet: Decentralized Validation Technology, or DVT. It promises to address a major concern about how traditional validation setups work on Ethereum by significantly decentralizing and securing the process.

Validators are the entities that create blocks on Proof-of-Stake (PoS) blockchains, similar to the miners of Bitcoin (and other Proof-of-Work (PoW) protocols). Since Ethereum moved fully to PoS in September 2022 with The Merge, the blockchain has been supported by a pool of approximately 900,000 validators, making it the most decentralized PoS network currently in operation .

However, not all that glitters is gold in this space. Multiple issues have been raised with how PoS is currently implemented in Ethereum, all of which contribute to making it a little less decentralized than it appears. But first, we need to dive into the weeds of what a validator actually is in Ethereum.

Ethereum validators are not like the rest

A big difference between Ethereum and other PoS networks is that validating nodes must have a stake of 32 ETH, no more, no less. This limit was chosen to provide a reasonable entry point for average Joes to bet without creating too many validators for no reason. Right now, 32 ETH is worth about $95,000, but when staking was first introduced (first as a separate chain) in 2020, it was closer to $30,000.

However, if you have more than 32 ETH, you will have to split your stake between several “validators”, which explains the large number of active validators today. In practice, there are likely 10,000 to 20,000 independent entities (including companies and independent participants) contributing to Ethereum’s security.

On a technical level, validators are a special entity controlled by their own private keys, which are activated when a potential staker connects 32 ETH to the Beacon chain. This chain manages the consensus process, assigning a portion of validators to propose blocks while others “testify” that those blocks are correct. Behaving inappropriately, for example by signing invalid blocks or being offline, results in a bet cut (although usually quite mild) or penalties to the ETH principal.

Many PoS (also known as Delegated-PoS or DPoS) systems allow stake delegation, where users can natively assign their coins to a particular validator, whom they trust to do a good job validating the chain and earning returns of stake (a centralizing force). In Ethereum, there are no native mechanisms to do this, meaning people have to run their own validator (key escrow) or rely on a service to do it, that is, until it appears DVT.

The imperative need to decentralize betting

The premise of Proof-of-Stake is that no entity can control more than a certain percentage of the total stake that is currently dedicated to validating a protocol. In this case, they can dictate which is the “majority” chain and start misbehaving with impunity, endangering the functioning of the network.

On Ethereum, the vast majority of staking power is currently held by Lido, a decentralized funding protocol that provides a convenient “wrapper” or liquid staking token (LST) of a user’s staked position called stETH. The advantage of this system is that you can just bet on the protocol or even buy the token and start betting for performance without doing anything else – the underlying system does everything for you.

Lido as a whole currently controls just over 31% of the ETH staked, which is dangerously close to the 33% threshold needed to prevent Ethereum blocks from being finalized (if Lido wanted it). This sounds worse than it really is: Lido is a decentralized protocol that distributes its participation among many independent node operators, so it cannot be easily coordinated to perform this attack.

Also, as a decentralized business whose entire model is based on the trust of the Ethereum community, it has no incentive to do so. Finally, a 33% attack is not the end of the world for Ethereum, as it would only result in blocks not being finalized; they would still be correct and the attacker could not actually exploit this problem.

But despite some caveats, some in the community are uneasy about Lido’s dominance, as the node operators it chooses ultimately have custody of the staked ETH and control part of the validation process. Lido, however, has started implementing technologies to decentralize its node operations by integrating the Simple DVT module.

These developments promote greater participation and collaboration, making it easier for smaller operators to align with larger counterparts, thus fostering a more diverse and robust network. This inclusive approach lays the groundwork for a trustless future, allowing even home validators to seamlessly integrate with Lido.

Decentralized validation technology to the rescue

If the problem is that validators are custodial and somewhat centralized, the logical solution is to turn this process into a decentralized, trustless mechanism. That, in a nutshell, is what DVT offers today.

DVT works by dividing an Ethereum validator’s private key into multiple shares using various cryptographic techniques. The shares are encrypted and distributed to the node operators, who then simultaneously run the validator to contribute to the security of Ethereum. Because operators never see or control the actual validator key, the process becomes custodial, trustless, secure, and much more error-tolerant.

DVT is just getting started, but could be an important part of Ethereum’s future roadmap. As the network pushes for greater scalability, there are serious discussions about increasing the 32 ETH limit to make the total number of validators more manageable. To counter the increase in centralization, DVT is proposed as one way to enable fully decentralized participation groups for smaller users.

Biography of the author

Adam Efrima is the co-founder of the SSV Core team, a decentralized validation infrastructure for ETH stake. He has been active in the crypto industry since 2013. During eight years living in China working in the financial industry and fintech space, Adam has worked at CITIC Bank covering outbound investments for Chinese SOEs. He was also responsible for setting up eToro’s Shanghai operation. Since then, Adam has been deeply involved in Ethereum staking, co-founding the performance staking project Bloxstaking.

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