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DVT 101: All You Need to Know on ETH Staking with Decentralized Validator Technology

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By Adam Efrima

The crypto space is full of buzzwords and abbreviations, and today, I’ll be discussing one that’s not quite so widespread yet: Decentralized Validator Technology, or DVT. It promises to fix a major worry about how traditional validator setups operate on Ethereum by significantly decentralizing and securing the process.

Validators are the entities that build blocks in Proof-of-Stake (PoS) blockchains, similar to miners in Bitcoin (and other Proof-of-Work (PoW) protocols). Ever since Ethereum moved entirely to PoS in September 2022 with The Merge, the blockchain has been supported by a set of approximately 900,000 validators, which theoretically makes it the most decentralized PoS network currently live.

However, not all that glitter is gold in this space. Multiple issues have been raised regarding how PoS is currently implemented in Ethereum, all of which contribute to making it a bit less decentralized than it would seem. But first, we need to dive into the weeds of what a validator in Ethereum really is.

Ethereum Validators Aren’t Like the Rest

A big difference between Ethereum and other PoS networks is that the validator nodes need to have a stake of 32 ETH — no more, no less. This limit was chosen so that it’d offer a reasonable entry point for average Joes to stake while still not creating too many validators for no reason. Right now, 32 ETH is worth about $95,000, but back when staking was first introduced (first as a separate chain) in 2020, it was closer to $30,000.

If you hold more than 32 ETH though, you’ll need to split your stake between multiple “validators,” which explains the very large number of active validators today. In practice, there are likely 10,000-20,000 independent entities (including companies and indie stakers) who are contributing to Ethereum security.

On a technical level, validators are a special entity controlled by their own private keys, which are activated when a prospective staker bridges 32 ETH to the Beacon chain. This chain manages the consensus process, assigning a portion of validators to propose blocks while others “attest” that these blocks are correct. Behaving improperly, for example, by signing invalid blocks or by being offline, leads to stake slashing (though it’s usually quite soft) or penalties incurred on the ETH principal.

Many PoS systems (a.k.a Delegated-PoS or DPoS) enable stake delegation, where users can natively assign their coins to a particular validator, who they trust to do a good job validating the chain and earning staking yield (a centralizing force). On Ethereum, there are no native mechanisms to do this, meaning that people must either run their own validator (self-custody of keys) or trust a service to do so — that is, until DVT came along.

The Pressing Need to Decentralize Staking

The premise of Proof-of-Stake is that no single entity can control more than a certain percentage of the total stake that is currently engaged in validating a protocol. In that case, they can dictate what is the “majority” chain and start behaving incorrectly without penalties, jeopardizing the functioning of the network.

In Ethereum, currently, the vast majority of the staking power is held by Lido, a decentralized finance protocol that offers a convenient “wrapper” or liquid staking token (LST) of a user’s staked position called stETH. The benefit of this system is that you can just stake on the protocol or even buy the token and start staking to earn yield without doing anything else — the underlying system does everything for you.

Lido as a whole currently controls a bit more than 31% of the ETH staked, which is dangerously close to the 33% threshold needed to prevent Ethereum blocks from being finalized (if Lido wished to do so). This sounds worse than it really is: Lido is a decentralized protocol that spreads its stake over many independent node operators, so it can’t really coordinate easily to perform this attack.

Also, as a decentralized business whose entire model relies on being trusted by 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’d just result in blocks not being finalized — they’d still be correct, and the attacker wouldn’t be able to really exploit this issue.

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

These advancements promote increased participation and collaboration, facilitating smaller operators to align with larger counterparts thereby fostering a more diverse and robust network. This inclusive approach sets the stage for a trustless future, allowing even at-home validators to integrate with Lido seamlessly.

Decentralized Validator Technology to the Rescue

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

DVT works by splitting an Ethereum validator’s private key into multiple shares via various cryptographic techniques. The shares are encrypted and distributed to node operators, who then simultaneously run the validator to contribute to Ethereum’s security. Because the actual validator key is never seen or controlled by the operators, the process becomes non-custodial, trustless, secure, and much more fault-tolerant.

DVT is only starting out, but it could be a significant part of Ethereum’s future roadmap. As the network pushes for more scalability, there are serious discussions of increasing the 32 ETH limit to make the total validator numbers more manageable. To counteract the increase in centralization, DVT is being proposed as one of the ways to enable fully decentralized staking pools for smaller users.

Author bio

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

The post DVT 101: All You Need to Know on ETH Staking with Decentralized Validator Technology appeared first on CryptoPotato.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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