A Dive into Distributed Validator Technology (DVT)
Emerging from the ashes of the transformative Ethereum merge and the Shapella update, a new era has dawned upon us: the rise of the Liquid Staking Derivatives (LSD) market. From the blossoming infrastructure built on pool staking protocols to re-staking and Maximal Extractable Value (MEV) yield-sharing protocols, this complex ecosystem encapsulates the innovative spirit of blockchain technology.
At the center of importance and innovation potential stands Distributed Validator Technology (DVT), the innovation that sets to revolutionize the Ethereum staking ecosystem. But what exactly is DVT, and how does it play into this dynamic landscape? Before we answer those questions, let’s take a step back and take a look at how DVT emerged in response to existing challenges.
Ethereum Proof of Stake Model
The shift from Proof-of-Work (PoW) to the Proof-of-Stake model has provided Ethereum holders the opportunity to secure the blockchain by staking their ETH on the network. Although staking Ethereum comes in various forms, setting up a validator node — the gold standard of staking — poses certain risks. The co-founder of Ethereum, Vitalik Buterin, recently detailed these complications in a Bankless episode with multiple Ethereum stakeholders.
The Perils of Single-Point Failure & Private Key Custody
The security of a validator’s private keys is paramount in solo validator operation. A loss of these keys not only locks access to funds but also exposes the validator to a single-point-of-failure vulnerability.
In Vitalik’s words:
“Because if you stake your ETH, the keys that access it have to be public on an online subsystem. For safety, it has to be a Multisig. Multisig for staking is still fairly difficult to set up; it gets complicated in many ways.”
In the case of Ethereum PoS, if there’s a security breach and the private key falls into the wrong hands, the validator risks a significant reduction in their stake, leading to a loss of a chunk of their locked funds.
Centralization of Staking
Owing to the challenges of solo staking, many Ethereum holders opt for pooled staking services such as Lido, Rocket Pool, Coinbase, and others.
Despite increasing the number of Ethereum stakers, this trend towards pooled staking services has resulted in a more centralized staking process, causing an increased risk associated with counter-party relationships, smart contracts, and execution. To give a radical example, Lido accounts for almost 80% of the total $ETH staked.
Slashing & Liveness Check Risk
Failures like network disconnections and software or hardware problems can inflict penalties on a validator client due to inactivity, leading to reduced staked balances. Furthermore, validators risk losing staked ETH if they act maliciously and damage the network.
These and other factors make Ethereum holders reluctant to stake significant portions of their ETH.
Here, DVT comes to the rescue.
The development of core infrastructure like DVT plays a vital role in the expansion of the LSD market. This could lead to an increased staking ratio of the eligible $ETH currently being staked, which has crossed 20% for the first time at the time of writing.
The potential increase in $ETH staked could happen due to more efficient staking performance and increased staking efficiency of LSDs, fostering a more decentralized environment, enabled mainly by the DVT technology.
What is DVT?
Distributed Validator Technology is a transformative innovation in blockchain security. Instead of placing the responsibilities of block validation on a single node, DVT allows these responsibilities to be shared across a network of nodes.
Imagine you have a large treasure chest that requires a cumbersome, heavy key to open (private key). With Distributed Validator Technology, you can split that key into smaller, manageable parts, each held by a trusted friend.
This ensures no single person is responsible for guarding and using the key. In tech-speak, these trusted friends are known as ‘validators’ and the treasure chest as ‘blockchain operations’. Distributed Key Generation (DKG) is the tool used to split these keys. As a result, staking becomes more efficient and decentralized.
Who benefits from DVT?
The real question might be, who doesn’t? Liquid staking pools can mitigate risk by dividing their stake among multiple operators. Solo stakers gain resilience against internet or power outages, leading to less slashing. Even institutional staking products can find value in DVT by reducing operational and hardware costs. The impact of DVT is extensive and wide-ranging, benefiting multiple stakeholders, especially risk-averse and security-gripped validators.
Navigating the Challenges of DVT
While the journey of every nascent technology is laden with obstacles, the challenges facing DVT represent the complex evolution of the technology and the potential for further improvement.
The limitations of the Byzantine Fault Tolerant (BFT) consensus mechanism used by DVT cap the number of nodes it can handle. During the early testnet phases, the limit of nodes that one could shard the keys was 13 on the SSV network and 10 on the Obol network. This could cause scaling and latency issues as more nodes must sign transactions before processing. However, these challenges don’t signal the end for DVT; rather, they represent the complex evolution of the technology and the potential for improvement.
The Landscape of DVT: Obol and SSV Network
There are currently two primary players shaping the DVT landscape — Obol and SSV Network. Both projects, originally developed by teams working on Ethereum, show the promise of DVT in action and demonstrate how this technology can be integrated into existing services, such as liquid staking models, e.g., Stakewise, Rocket Pool, and Lido.
Lido conducted a post-merge two initial pilot programs, successfully demonstrating the ability to use a DVT configuration in the Lido Node Operator Registry on Goerli with both Obol Network and SSV Network.
What exactly are Obol and SSV Networks achieving?
DVT Project Spotlight: Obol Network
Obol Network, developed by the creators of the original Eth2 Staking Launchpad, serves as a staking infrastructure coordination layer using DVT. It’s already attracting significant investment from Pantera Capital and Archetype, which co-led the series A round in which the company raised $12.5M.
Obol currently does not plan for a native token but instead intends to use Ethereum for incentivizing distributed validators. However, Obol does take a small percentage fee of validator rewards. This reward is taken when the validation rewards are given out, not during the withdrawal process. The percentage number was not yet publicized, so it’s particularly interesting to see how Obol will set up this revenue-creating infrastructure down the line.
Obol is currently in the Alpha Launch part of the roadmap, in which they are working with a set of launch partners who’ve already deployed an initial set of decentralized validators on Mainnet.
This design ensures to keep the number of participants in the Alpha Launch is small for the team to learn from the initial deployments and increases the scale in our upcoming Beta phase and V1 Launch.
Apart from Ethereum, Obol is also planning to explore scaling solutions for Ethereum L2s and Cosmos since the team believes that DVT can make a substantial contribution to other PoS ecosystems, with Cosmos on the frontline.
DVT Project Spotlight: SSV Network
SSV is the first public implementation of SSV (Secret-Shared-Validators) technology. What started as a research paper conceptualized in collaboration with members of the Ethereum Foundation, later labeled DVT, is now a fully functional open source decentralized ETH staking incentivized testnet. SSV Network rebranded from The Blox (CDT) in 2021 and redominated the token 100:1.
In contrast to Obol, SSV Network has launched its native token, $SSV, which is used for both payments and governance within the network.
The SSV network represents an intriguing opportunity. However, the tokenomics are not yet fully defined as multiple incentivization questions remain unanswered, while there’s a fierce discussion within the SSV Network community on how to set the utility token to facilitate payments and govern while alleviating the speculation effect. For the time being, the $SSV token serves as a means of payment and governance.
- Payments — serve as a way for stakers to compensate operators for managing their validators (Stakers using SSV Network will pay operators using $SSV)
- Governance — a way to participate in SSV Network-related decision-making and treasury allocations.
Each participating operator can determine its own price point and compete with other network operators. A percentage of fees collected by operators will be allocated to the DAO treasury in return, the DAO will determine the payment in an open vote.
SSV Network has recently shared their rollout plan about when they are going live on Ethereum. The project is currently in the pre-launch phase and plan to do a permissionless launch around November of 2023.
The permissionless launch will enable the public to register permissionless operators and validators to the SSV Network, and from there on, everyone can use SSV Network to build or stake.
It’s important to note that each network’s model has its own set of advantages and potential challenges. Obol’s model might appeal to operators who prefer to be rewarded in Ethereum and are comfortable with a fee-based system. SSV’s model, meanwhile, might attract operators who are interested in having a more active role in the network’s governance and are comfortable with the potential volatility of a native token.
Conclusion
As an innovative leap forward, Distributed Validator Technology (DVT) is poised to tackle the challenges of centralization and risk inherent in Ethereum staking.
With projects like Obol Network and SSV Network leading the charge, we’re witnessing the unfolding of a groundbreaking chapter in blockchain technology. Furthermore, the landscape of DVT is rich and diverse, filled with opportunities, risks, and a future that promises continual evolution.
In conclusion, DVT is like a game-changer for staking mechanics. As it develops, we are bound to see more efficient, decentralized, and secure staking on Ethereum, setting the stage for unprecedented growth and innovation in the broader blockchain industry.
Iconium Team
About Iconium
Founded in 2018, ICONIUM is a private company that invests in digital assets and blockchain projects that will lead the decentralized internet era.
With over 25 years of experience in the tech and digital industry and more than five years of experience in the blockchain industry, our team has already invested in dozens of projects and analyzed more than 2000 projects over the past four years.
At ICONIUM, we value curiosity of mind and an entrepreneurial mindset. We are always looking for teams both in the launch and in the growth phase to help them achieve their goals. We are long-term investors, and we want to contribute to the growth of projects that will shape the economy of tomorrow.
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