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

By Adam Efrima

The crypto space is full of buzzwords and abbreviations, and today I will discuss one that is not yet as widespread: decentralized validation technology or DVT. It promises to address a major concern about how traditional validator setups work on ethereum by significantly decentralizing and securing the process.

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

However, not all that glitter is gold in this space. Multiple questions have been raised regarding how PoS is currently implemented on ethereum, all of which contribute to it being a little less decentralized than it appears. But first, we need to delve into what a validator on ethereum actually is.

ethereum validators are not like the rest

A big difference between ethereum and other PoS networks is that validator nodes must have a stake of 32 eth, no more and no less. This limit was chosen so that it would offer a reasonable entry point for average citizens to stake without creating too many validators for no reason. Right now, 32 eth is worth around $95,000, but when staking was first introduced (first as a separate chain) in 2020, it was closer to $30,000.

However, if you own more than 32 eth, you will need to split your stake among several “validators”, which explains the large number of currently active validators. In practice, there are likely between 10,000 and 20,000 independent entities (including companies and independent stakers) contributing to the security of ethereum.

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 “attest” that these blocks are correct. Behaving inappropriately, for example by signing invalid blocks or going offline, leads to a stake reduction (although it is usually quite mild) or penalties on the eth principal.

Many PoS systems (also known as Delegated PoS or DPoS) allow 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 getting staking returns. (a centralizing force). On ethereum, there are no native mechanisms to do this, meaning people must 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 betting

The premise of Proof of Stake is that no entity can control more than a certain percentage of the total stake currently dedicated to validating a protocol. In that case, they can dictate which is the “majority” chain and start behaving incorrectly without penalties, putting the operation of the network at risk.

On ethereum, the vast majority of staking power is currently in the hands of Lido, a decentralized financial 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 simply stake the protocol or even buy the token and start staking for yield without doing anything else – the underlying system does everything for you.

Lido as a whole currently control S a little 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 to do so). This sounds worse than it really is: Lido is a decentralized protocol that spreads its stake across many independent node operators, so it really can't be easily coordinated to carry out this attack.

Furthermore, as a decentralized company whose entire model depends 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 simply result in blocks not being finalized; they would still be correct and the attacker would not be able to really exploit this issue.

But despite some warnings, some in the community are uncomfortable with Lido's dominance, as the node operators it chooses ultimately have custody of the staked eth and control part of the validation process. However, Lido has started implementing technologies to decentralize its node operations by integrating the Simple DVT module.

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

Decentralized validation technology to the rescue

If the problem is that validators are custodians and somewhat centralized, the logical solution is to convert this process into a decentralized and trustless mechanism. This is, in a nutshell, what TVP offers today.

DVT works by splitting an ethereum validator's private key across multiple shares using various cryptographic techniques. Shares are encrypted and distributed to 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 non-custodial, untrusted, secure, and much more fault tolerant.

DVT is just getting started, but it could be an important part of ethereum's future roadmap. As the network seeks greater scalability, there are serious discussions to increase the 32 eth limit to make the total number of validators more manageable. To counteract the increase in centralization, DVT is proposed as one of the ways to enable fully decentralized staking pools for smaller users.

Author biography

Adam Efrima is he SSV Co-founder of the core team, a decentralized validation infrastructure for eth staking. He has been active in the crypto industry since 2013. For eight years living in China working in the financial industry and fintech space, Adam has worked at CITIC Bank covering outbound investments for Chinese state-owned companies. He was also in charge of establishing eToro's Shanghai operation. Since then, Adam has been deeply involved in ethereum staking, co-founding the stage staking project Bloxstake.

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