Everything You Need to Know About ETH Staking with Decentralized Validator Technology
By Adam Efrima
The crypto space is full of buzzwords and acronyms, and today I’m going to discuss one that isn’t that common yet: Decentralized Validator Technology or DVT. It promises to address a major concern about how traditional validator setups work on Ethereum by significantly centralizing and securing the process.
Validators are entities that create blocks on Proof-of-Stake (PoS) blockchains, similar to miners in Bitcoin (and other Proof-of-Work (PoW) protocols). Since Ethereum moved entirely to PoS with The Merge in September 2022, the blockchain has been supported by a group of approximately 900,000 validators, theoretically making it the most decentralized PoS network currently live.
But not all that glitters is gold in this area. Many issues have been raised regarding how PoS is currently implemented in Ethereum, all of which contribute to making it a little less decentralized than it seems. But first we need to dive into the details of what a validator in Ethereum actually is.
Ethereum Validators Are Not Like Others
The big difference between Ethereum and other PoS networks is that validator nodes must hold 32 ETH stakes; neither more nor less. This limit was chosen to provide a reasonable entry point for average Joes to stake and still not create too many validators for no reason. Currently 32 ETH is worth around $95,000, but when staking was first introduced in 2020 (first as a separate chain) it was closer to $30,000.
But if you own more than 32 ETH, you will need to split your stake among multiple “validators,” which explains the large number of active validators these days. In practice, there are probably 10,000-20,000 independent organizations (including companies and independent stakers) contributing to Ethereum security.
On a technical level, validators are a private entity controlled by their own private keys, which are activated when a prospective staker connects 32 ETH to the Beacon chain. This chain assigns some of the validators to propose blocks, while others manage the consensus process by “certifying” that these blocks are correct. Inappropriate behavior, such as signing invalid blocks or going offline, will result in a staking penalty (albeit usually quite lenient) or an ETH principal penalty.
Many PoS systems (aka Delegated-PoS or DPoS) enable staking delegation, where users can assign their funds locally to a specific validator, trusting that it will do a good job of validating the chain and generating returns on staking (a centralizing power). There are no native mechanisms to do this in Ethereum; This means people either have to run their own authenticators (self-storing the keys) or rely on a service to do it – that is, until DVT comes along.
Urgent Need for Decentralization of Staking
The basis of Proof-of-Stake is that no entity can control more than a certain percentage of the total stake currently engaged in validating a protocol. In this case, they can dictate what the “majority” chain is and endanger the operation of the network by engaging in misbehavior with impunity.
In Ethereum, the vast majority of staking power is currently held by Lido, a decentralized finance protocol that offers a convenient “wrapper” or liquid staking token (LST) of the user’s staked position, called stETH. The advantage of this system is that you can simply stake on the protocol, or even buy the token and start staking to earn returns without doing anything else; The base system does everything for you.
Lido as a whole currently controls just over 31% of ETH shares; This is dangerously close to the 33% threshold required to prevent Ethereum blocks from being terminated (if Lido wants it). This sounds worse than it actually is: Lido is a decentralized protocol that distributes its stake across many independent node operators, so it really can’t easily coordinate to carry out this attack.
Plus, 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 will simply lead to blocks not being finalized; these will still be true and the attacker will not be able to truly exploit this issue.
But despite some warnings, some in the community are unhappy with Lido’s dominance because, after all, Lido’s chosen node operators have oversight over staked ETH and control some of the verification process. However, Lido has started to implement technologies to decentralize node operations by integrating the Simple DVT module.
These developments encourage greater participation and collaboration, making it easier for smaller operators to align with larger competitors, fostering a more diverse and robust network. This inclusive approach paves the way for a trustless future and allows even home authenticators to seamlessly integrate with Lido.
Decentralized Authenticator Technology for Recovery
If the problem is that validators are monitored and centralized in some way, the logical solution is to turn this process into a decentralized and trustless mechanism. That, in a nutshell, is what DVT offers today.
DVT works by splitting the Ethereum validator’s private key into multiple shares through various encryption techniques. Shares are encrypted and distributed to node operators; these operators then simultaneously run the validator to contribute to the security of Ethereum. Because the actual authenticator key is never seen or checked by operators, the process becomes unattended, reliable, secure and much more fault-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 of the ways to enable fully decentralized staking pools for smaller users.
Author biography
Adam Efrima is the co-founder of the SSV Core team, a decentralized validator infrastructure for ETH staking. Active in the crypto industry since 2013. Having lived in China for over eight years and working in the financial sector and fintech space, Adam worked at CITIC Bank covering foreign investments into Chinese SOEs. He was also responsible for establishing eToro’s Shanghai operation. Since then, Adam has become deeply involved in Ethereum staking and co-founded a staking project called Bloxstaking.
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