Distributed Validator Technology — The Next Ethereum Roadmap Narrative?
If you have been closely following Ethereum’s development roadmap, you may have noticed that the “The Merge” segment includes the integration of both “withdrawals” and “distributed validators.” Withdrawals are receiving significant attention, with a targeted date of March for completion. However, it’s important to also understand what “distributed validators” refer to. With this article we want to cover DVT, how it works and if it’s the next big narrative on Vitalik’s way to change the crypto space.
Ethereum PoS Model Issues
The Ethereum Proof of Stake (PoS) model allows anyone to participate in the network by setting up a validator node, staking the necessary amount of ETH, and validating transactions. However, many individuals are choosing to go through staking services instead. This raises questions about the reasons behind this decision and the risks involved for both validators and stakers. So let’s have a look at the various risks associated with the Ethereum PoS model and how they may impact the decision to use staking services.
Retail investors, particularly those with small amounts of ETH, may find it difficult to set up and maintain a validator for Ethereum PoS. As a result, they turn to staking services to stake their ETH. However, these investors typically hold their funds on centralized exchanges, meaning they would use a custodial staking service. Currently the top four providers make up 55.51% of the total marketshare.
While these services may be easy to use, they also pose risks, including centralization. This centralization can be detrimental to the overall network, as it means handing over control to an operator who is not immune to penalties, errors, hacks, or censorship.
Single Point Of Failure
The security of a validator’s private keys is a critical concern when running a solo validator. If a validator loses access to their private keys, they risk losing access to their funds, leading to a poor user experience and a vulnerability of single-point-of-failure. The Ethereum PoS protocol also poses challenges, as it prohibits any form of redundancy. This means that a validator can only sign messages or remain online through one machine. If an attacker breaches the machine and obtains the private key, they can cause the validator to suffer a slash of their stake, resulting in a loss of a portion of their locked funds. This highlights the significant risks of a single point of failure.
Validator Liveness Check
When a validator client experiences any type of failure, such as network connection disruptions, cloud failures, software crashes, or hardware issues, they may face penalties for inactivity. These penalties result in a loss of a portion of their staked balances. Additionally, validator clients may also be penalized for double-signing, particularly if they go offline while signing a message. This can lead to deposit slashing if they use the same key multiple times, sign the same message twice, or go offline when others are offline. This scenario favors professional validators and discourages the average user from becoming one, resulting in a concentration of power among a small number of validators.
Private Key Custody
“Not your keys, not your coins” — yes we know you’ve heard this phrase more than enough but while staking services can provide an alternative for those who don’t want to handle validator setup and maintenance on their own, it comes with the risk of giving control of your private keys to a staking service operator. This requires a level of trust in the operator to ensure the security of your staking keys. In a field where anything can go wrong and potential threats exist, it may not be wise to rely on others to hold your private keys.
Under the PoS system, validator clients connect to Beacon nodes. However, if a Beacon node that a validator is connected to experiences a malfunction, it can create a fork in the network. This can cause the validator client to follow the forked chain and appear offline to the main PoS protocol, resulting in penalties and potentially leading to loss of deposited funds. This can create centralization issues that go against the principles of a decentralized and transparent blockchain. To address these concerns, DVT has been developed. DVT aims to solve the problems of security threats and penalties — but how?
What Is DVT?
With DVT, an Ethereum validator can be run on multiple nodes instead of just one. This splits the traditional model of one node equating to one validator across a cluster of nodes that work together as a single validator. Each node holds a portion of the complete validator key, with the full key never existing on a single node at any given time. The nodes within the cluster use their key shares to generate partial BLS attestations. If a certain number of active validator nodes is reached, the cluster will function as a full validator. This means that the cluster can still operate as a full validator even if several nodes go offline, as long as there are enough active nodes to reach the established threshold.
The key benefit of DVT is that it eliminates single points of failure within blockchain consensus layers, thereby increasing the stability of the network. DVT reduces the risks associated with hardware, as anyone who has worked with nodes knows that they are not perfect and can unexpectedly go offline. With single-node validators, this can result in missed rewards and lower network stability, but with DVT, this risk is greatly minimized.
Currently, some validators run active-passive setups to avoid downtime caused by hardware issues, but this sometimes leads to double attestation and validators being slashed. DVT eliminates the need for active-passive setups and significantly reduces the risk of slashing.
Hot keys stored on single-node validators are vulnerable through one attack route, meaning that if the node is compromised, the entire validator and its 32ETH stake is at risk. With DVT, multiple nodes must be compromised for the validator to be at risk. Depending on geographical and technical distribution, this makes hot key compromisation much more difficult.
From a community and home-staking perspective, DVT is essential. With DVT, multiple nodes can pool assets in a trustless manner, enabling higher home-staking participation through reduced financial barriers to entry. This barrier has been removed by liquid staking derivative providers, but home-staking enables the ultimate level of decentralization and maximizes staking rewards. DVT further enhances home-staking participation by removing the technical fear of validators going offline or being slashed in the event of home node hardware failure.
DVT will also solve issues with stake centralization within liquid staking protocols and diversification issues associated with client types on validators. The importance of DVT impacts all validator types: institutional validators, liquid staking protocols, community validators, and solo validators.
Why Could DVT Be The Next Narrative?
The use of DVT is already being considered by some liquid staking protocols, with projects such as Lido and SSV Network conducting pilot integrations on testnet as well as with Obol Network. It is likely that in the next year, major liquid staking providers will adopt DVT for a decent amount of their validators within the Ethereum network. However, the perception of home-staking as being difficult for non-technical individuals may hinder the adoption of DVT for retail and non-liquid staking providers. On the other hand, institutional staking is a prime candidate for DVT. Regulatory-compliant DVT clusters could potentially become the dominant validator makeup of the Ethereum network in the future, but this will likely depend on regulatory clarity.
Is $SSV A Good Play?
The primary use cases of $SSV are for payments and governance within the ssv.network ecosystem.
- Payments: Stakers can use $SSV to compensate operators for managing their validators.
- Governance: $SSV allows for participation in decision-making and treasury allocation within the network. $SSV plays a crucial role in motivating and engaging the community to contribute to the network’s growth.
In terms of tokenomics, stakers on the ssv.network will use $SSV to pay operators. Each operator can set their own price point, creating competition within the network. A portion of the fees collected by operators will be allocated to the DAO treasury, and the DAO will make decisions on how to utilize these funds through open voting. As more ETH is staked on the network, the more fees will be paid to operators and the DAO treasury. The DAO can then use these funds to promote network growth and development, creating a positive feedback loop of increased ETH staking and $SSV revenue. We think SSV is a very interesting technology that solves a real problem and therefore could be a nice play in the upcoming months. But what does it exactly do?
The SSV network is a decentralized, open-source platform for staking Ethereum, utilizing DVT. They create multiple KeyShares for a validator key, which can be run across non-trusting nodes. This provides active-active redundancy, increased security for validator keys, and benefits for the Ethereum network, staking pools, staking services, and individual stakers.
Benefits Of SSV
The SSV network offers several advantages for stakers, including active-active redundancy and fault tolerance, non-custodial and secure staking, and decentralization and diversity.
Active-active redundancy and fault tolerance are achieved by splitting the validator key into multiple KeyShares and distributing them to multiple nodes. This ensures that if one node goes offline, the other nodes will respond to keep the validator operating.
Non-custodial and secure staking is possible by generating, splitting, and distributing the validator key to non-trusting nodes, and then securely storing it offline. This means that users never have to hand over their validator key to any operators.
Decentralization and diversity are promoted by independent operators located all over the world, who are responsible for maintaining the overall health of the network. Each operator is free to choose the validator client software and hardware infrastructure, while stakers are free to choose the independent operators that will run their validator. This increases the overall health of the Ethereum blockchain and eliminates single points of failure and risk for stakers by allowing validators to run on multiple clients.
DVT addresses the challenges of staking on Ethereum and makes it more accessible to the general public while promoting true decentralization. With DVT, validators, whether institutional or retail, can meet the safety and liveness requirements of the protocol, improve resilience, benefit from Active-Active redundancy configurations, and adapt their operations based on various factors. As Ethereum fully transitioned to a proof-of-stake blockchain, validators are looking for more secure and efficient ways to operate. DVT offers a chance for Ethereum staking to become more decentralized and profitable even for retail investors. Obol Network and ssv.network are currently at the forefront of creating an ecosystem for trust-minimized staking that allows people to create, test, run and coordinate distributed validators. Hopefully, we’ll see more progress in this area in the upcoming months.
Who We Are
Moonrock Capital is a Blockchain Advisory and Investment Firm, incubating and accelerating early stage startups since 2019.
Disclaimer: None of the information contained here constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy.