Distributed Validator Technology (DVT) Overview: Pt. 1
Decentralized Validators
Welcome to my blog! Today, I’m diving into Distributed Validator Technology (DVT) in part one of a two-part report covering everything there is to know about DVT, a relatively novel Ethereum staking mechanism. DVT was made possible after Ethereum’s move from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus network on September 15, 2022, during The Merge. It allows stakers to split operational validator duties amongst a group of people, essentially creating a multi-sig model that allows a single Ethereum validator to be run on multiple machines in different locations by different entities. Currently, three protocols, SSV Network ($SSV), Obol Network, and Diva Protocol, are at the forefront of developing and implementing this technology with Ethereum. These three protocols will be covered in part two of this DVT report.
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When Ethereum shifted to a Proof-of-Stake (PoS) network during The Merge, it began to rely on stakers to provide consensus and secure the network instead of miners. This brought lots of positives like allowing anyone who owns ETH to stake in the Ethereum network through liquid staking protocols like Lido and Rocketpool and reducing the energy consumption of Ethereum by ~99.95%. However, the issue of centralization began to rear its ugly head as it is always a concern in a supposedly “decentralized” network. After staking went live, centralized entities that aggregate stakers like Lido began staking in Ethereum but contributed an alarming amount of blocks to the network. Currently, Lido makes up ~31.8% of stakers in the Ethereum network with ~6.1m ETH staked with them while Coinbase makes up ~11.9% of stakers in the Ethereum network with ~2.8m ETH staked with them.1
The concentration of stakers validating new blocks through centralized entities posed and continues to pose a concern for the community because a couple entities like Lido and Coinbase could theoretically collude with each other and interrupt the network. As a result, the Ethereum Foundation (EF) and Ethereum community is constantly trying to find ways to make it easier and safer for users to set up their own validators and move away from these centralized staking entities. Distributed Validator Technology (DVT) accomplishes this by making the 32 ETH barrier to entry easier to reach while also making it less likely that validators have their stake slashed due to unforeseen circumstances.
When users set up their own validators, they have to buy their own hardware, set up the correct software, and custody their own private key. Many validators also opt to use Amazon Web Services (AWS) to host the validator instead of running their own hardware but that means hundreds of dollars in fees to AWS every year instead of purchasing their own equipment. All of this doesn’t even include the 32 ETH required to run the validator, which as of writing on May 9, 2023, is worth at least $60,000 when not including gas and transaction fees. This process is very expensive and can be extremely technical for normal retail users as Coogan Brennan of Consensys lays out in his blog.
However, once someone finally goes through the trouble of setting up their validator online, their issues only become exacerbated. As a validator, they are constantly risking their 32 ETH stake and will lose part of their stake if their validator is set up incorrectly or ever misbehaves by confirming false transactions or making an incorrect attestation.2 Validators can also be slashed for any downtime that occurs, meaning if your power goes out or you accidentally close something by accident, you will lose part of your 32 ETH stake.
Now that I’ve explained some of the troubles that come with running your own validator, it’s clear why so many people simply stake with large entities like Lido or Coinbase that do everything for you so you can just collect your staking rewards. In order to stake with Lido or Coinbase, you simply convert your ETH into stETH (Lido) or cbETH (Coinbase), a liquid token representing your staked ETH that collects rewards automatically every day. There is also no 32 ETH requirement so anybody with any amount of ETH can stake with these larger entities. This proves a much simpler and easier solution for anybody compared to running a personal node that requires constant upkeep.
However, the goal for the Ethereum community is still to move towards a higher level of decentralization and the implementation of Distributed Validator Technology (DVT) works towards that goal by solving many of the issues I just highlighted.
Distributed Validator Technology (DVT)
Distributed Validator Technology is a decentralized staking protocol that sits as a middle layer between the Ethereum Beacon Chain and the Ethereum validator client that allows anyone to set up a distributed validator. For example, if we have four entities, it gives these four users the ability to come together to create and share the operational duties of one validator over four separate devices. The 32 ETH requirement to set up a validator can also be split amongst each participant, lowering the monetary barrier to entry by a significant amount.
When a distributed validator is created, DVT also makes it so that a validator’s private keys are shared amongst the four devices, creating an environment similar to a multi-sig wallet that requires multiple signatures to execute a transaction. In this case, the validator would need, for example, three out of four signatures to be available and active every time it wants to validate a block. This is a good requirement because that means that the validator can continue functioning even if one of of the node operators is acting maliciously or is not active for whatever reason. Funds can also be kept safe even if a participant loses their private key because the remaining three participants can still use their keys to unlock their stake. In comparison, a single user who operates their own validator would be a one of one user that forces dependency on one entity, creating multiple single points of failure.
Watch this video by SSV Network for a visual explanation:
The image below describes how each part of DVT integrates with Ethereum and works in a diagram:
DVT Technology
The technology behind DVT works via multiple mechanisms including a distributed key generation (DKG) scheme that allows multiple parties to take part in creating and sharing a private key but not giving any single group member full control. This is ensured via Shamir’s secret sharing, a cryptographic algorithm that allows private information— “secrets” — to be distributed securely amongst an untrusted network. When validator keys are spun up, this allows the private key to be split so that each participating validator client holds their piece of the key and no individual share is sufficient to induce an action but when brought together, can unlock the intended action. In our example above, this is done with a three out of four threshold so that only three out of the four distributed private keys need to be present and available to allow the validator client to remain online. Lastly, DVT must employ a mechanism known as multi-party computation (MPC), which makes sure that participating validators can use their keys to sign messages and perform computations without giving them the ability to work backwards and reconstruct the full validator key on any single device. This is necessary to eliminate the threat of exposing the secrets and centralizing the private key during computation.
Changing the Ethereum Staking Landscape
DVT will change the Ethereum Staking Landscape forever as some of of the biggest liquid staking protocols like Lido and Rocket Pool begin testing the technology for use in their validator pools.
Lido is set to release Lido V2 with the final on-chain vote happening May 12, 2023 and ending May 15, 2023. Lido V2 is primarily focused on allowing 1:1 ETH withdrawals from the Ethereum network but it also includes setting up a Staking Router controller contract that would allow the protocol to set up modular pools that can run validators via infrastructure like DVT.3 Lido has already tested DVT through Obol Network and plans on continuing to conduct additional testing with Obol Network and SSV Network.4
Rocket Pool has had discussions on its governance forum back in March 2022 about incorporating DVT into its protocol to create the ability for Rocket Pool minipools that are backed solely by RPL tokens instead of ETH.5 Rocket Pool doesn't have any further mention of DVT in its official blog but I predict it will have a big impact on the protocol moving forward.
It’s evident that DVT will prove itself as huge development in Ethereum staking moving forward and I want to dive into the specific protocols that are leading the way; SSV Network ($SSV), Obol Network, and Diva Protocol. However, these will be covered in part two of this report so subscribe below and follow me at my Twitter @Khrippex to stay up-to-date!
To learn more about what DVT is and for some more in-depth reading, I’d take a look at Panther Academy’s article here, @Leo_Glisic’s Twitter thread here, Mara Schmiedt’s article here, and Chainslab’s article here.
I am not a financial advisor. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
Cool post. Thanks! Will try it out!