By Adam Efrima
As a crypto analyst, I’d like to explore a lesser-known concept in the blockchain world: Decentralized Validator Technology, or DVT for short. Unlike some buzzwords that have taken center stage in the crypto space, DVT is not yet a household name. However, it holds great promise in addressing a significant concern regarding the centralization of validator setups on Ethereum. By decentralizing and securing this process, DVT aims to mitigate potential risks and enhance overall network resilience.
In Proof-of-Stake (PoS) blockchains like Ethereum post-The Merge in September 2022, validators act as the builders of new blocks instead of miners present in PoW systems such as Bitcoin. With approximately 900,000 validators currently involved, this setup theoretically results in an exceptionally decentralized network.
While it may appear shiny and valuable at first glance, not every aspect of Proof of Stake (PoS) in Ethereum lives up to expectations. Several concerns have surfaced regarding the current implementation of PoS, which collectively reduce its decentralization potential. Before delving deeper into these issues, let’s clarify what a validator entails in the context of Ethereum.
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 possess over 32 ETH, it’s necessary for you to distribute your stake among various “validators.” This requirement is the reason for the large number of active validators observed in Ethereum today. In reality, there are approximately 10,000 to 20,000 distinct entities (encompassing businesses and individual stakers) that are currently bolstering Ethereum’s security.
As a researcher studying the Ethereum 2.0 network, I can explain that validators are crucial entities responsible for maintaining the consensus process. They are activated when a staker transfers 32 ETH to the Beacon chain and becomes part of this network.
In the context of cryptocurrencies, many Proof of Stake (PoS) systems, also known as Delegated PoS or DPoS, allow users to assign their coins to trusted validators for staking and validation purposes. This delegation mechanism centralizes the control since users depend on these validators to maintain the blockchain securely and earn rewards. On Ethereum, however, there isn’t a built-in method for this functionality. Users must either run their own validator nodes (maintaining key self-custody) or rely on third-party services. The emergence of DVT (Decentralized Validator Token) aims to change that by providing a decentralized solution for Ethereum staking and validation.
The Pressing Need to Decentralize Staking
As a researcher studying consensus algorithms, I can explain Proof-of-Stake (PoS) from the perspective of its fundamental principle: no individual or entity should possess more than a defined proportion of the overall stake involved in validating a given protocol. The rationale behind this is that if any single entity were to hold an excessive amount of stake, they could potentially manipulate the network by determining which chain represents the “majority,” thereby acting maliciously without facing any consequences. This behavior could compromise the entire network’s functionality.
In Ethereum’s current setup, Lido, a decentralized finance (DeFi) platform, manages the lion’s share of staked Ether. By using Lido, users can easily stake their Ether and receive a liquid staking token (LST), such as stETH, which represents their staked position. The advantage of this system lies in its convenience: you can either stake directly through the platform or buy the token and begin earning yield without any additional steps – the underlying process takes care of everything for you.
Approximately 31% of all staked Ethereum is currently managed by Lido as a collective, which comes perilously close to the 33% mark that could potentially halt Ethereum block finalization if intentionally acted upon. However, it’s essential to remember that Lido is a decentralized protocol, meaning its stake is distributed among numerous independent node operators. Consequently, coordinating an attack through this collective would be challenging due to its decentralized nature.
As an analyst, I would rephrase your points as follows:
Although some in the community express concerns about Lido’s growing influence due to the significant control its chosen node operators hold over staked Ethereum and validation processes, Lido is making strides towards decentralization. Specifically, it has begun implementing the Simple DVT (Decentralized Validator Technology) module to distribute node operations more broadly.
As an analyst, I would rephrase it as follows: I believe these advancements encourage greater involvement and teamwork, enabling smaller players to align more effectively with their larger counterparts. This approach fosters a more intricate and sturdy network that is diverse and robust. By adopting an inclusive stance, we pave the way for a trustless future where even at-home validators can effortlessly integrate with Lido.
Decentralized Validator Technology to the Rescue
If the concern is that validators are in a custodial and somewhat centralized role, the answer could be to transform this function into a decentralized and trustless system. Essentially, this is what Decentralized Validator Technology (DVT) brings to the table today.
As a researcher studying Ethereum’s decentralized validation system, I can explain that DVT, or Decentralized Validator Technology, enables an Ethereum validator’s private key to be divided into multiple shares using advanced cryptographic methods. These encrypted shares are subsequently distributed among node operators who collaborate in running the validator. By maintaining this non-custodial setup, where the actual key remains hidden and uncontrolled by the operators, we ensure a trustless, secure, and highly fault-tolerant Ethereum network.
DVT is just getting started within Ethereum’s development plans, but it could play a substantial role in the network’s future. With scalability being a priority, there are ongoing conversations about expanding the 32 ETH validator cap to accommodate larger numbers of validators. To prevent centralization, DVT is proposed as a solution for creating completely decentralized staking pools that smaller users can access.
Author bio
Adam Efrima is a founding member of the SSV Core team, which develops decentralized infrastructure for Ethereum staking. He entered the cryptocurrency field in 2013 and spent over eight years living and working in China within the financial industry and fintech sector. During this time, he handled outbound investments for Chinese state-owned enterprises at CITIC Bank. Furthermore, Adam established eToro’s Shanghai office. Since then, his focus has shifted to Ethereum staking, where he co-founded the successful staking project, Bloxstaking.
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2024-05-13 20:15