This is Part 4 of a six part series called A Beginner’s Guide to Staking
We can look at this from a few different perspectives: the issues that potential and individual stakers face, and the issues that the Ethereum network, as a whole, faces.
Issues that stakers face
The technical barrier for running a validator is still quite high today. Staking on Ethereum is still in its infancy - it went live fewer than three years ago. There are projects who are making it easy to stake, but there are still a lot of things to build. Some projects are building graphical user interfaces (GUIs) that automate a lot of the commands that are needed to launch a validator, but the most mature options right now still require interaction with command line interface (CLI).
Staking software needs more user design people. A great example of a very good project lowering the bar for solo staking is DAppNode. But even DAppNode could use some more people who are experts are abstracting away from the user the scary technical words and steps that are a barrier to someone who didn’t grow up troubleshooting computers.
It’s also difficult for someone new to Ethereum to come in and read what’s a scam and what’s not. Transacting on Ethereum is new and it takes a while to get the hang out of what’s normal. Systems should dissuade people from making small mistakes that lead to an irrevocable loss of funds, signing fraudulent transactions, or generally being phished and scammed. This needs to be done at the user design level - wallets should eventually use publicly available data to identify known wallets associated with scams and warn users when they’re potentially interacting with bad actors.
What you can do
If you’re a user design person - you’re needed! Read through the resources on ethstaker.cc and on ethereum.org/en/staking. Get help in the ethstaker discord setting up a testnet validator. Use software like Stereum, wagyu, eth-wizard, and DAppNode to do it. Familiarize yourself with the process and find a project you’d like to help.
On the other side of things, you can write docs! Good protocol have good, visible, search-engine optimized docs. The nerds coding these protocols sometimes don’t have the time or skills to write accessible docs. Anyone can come in, familiarize themselves with these projects, and write docs. Many projects in this ecosystem are open source and can be worked on by anyone by creating pull requests on Github.
The single biggest complaint that the community sees is about the 32 ETH deposit threshold. This was chosen for good reason and chosen when that value was <$10,000. That 32 ETH guarantees that the validator won’t lie to the network because they stand to lose a portion of it if they act maliciously.
Regardless, this does disproportionately affect lower-income nation citizens and access to a validator should be more geography-agnostic. There are projects who aim to lower that barrier. One of many examples is Rocket Pool, who have lowered the barrier to 16 ETH and will lower it further to 8 ETH this year. Another set of projects are Distributed Validator Technology (DVT) protocols.
While these add a layer of smart contract risk, this risk can be mitigated with testing, audits, bug bounties, & time live on mainnet. The longer a protocol is live, the less the likelihood that it has critical bugs that could put your stake in jeopardy.
What you can do
Get involved in the communities of the projects who are aiming to lower that barrier! Stake using their liquid staking token. Help them test their product on testnets. Write or edit docs and guides for the project.
Issues that the Ethereum protocol faces
Ethereum is very young. It’s being built with an eye to the future - the entire reason why people are so excited for this new technology is because it opens doors to all sorts of things that aren’t currently possible. We can improve an individual’s ability to manage and have full control over their own data and assets.
The term ‘web3’ comes from the idea that a decentralized blockchain gives us to the ability to read-write-own. We want to be able to own our assets and data in a way that we never have been able to before. But to achieve these goals, we have to build a solid foundation for the Ethereum ecosystem to sit on. Validators are the material that is used to build that foundation.
A natural tendency
Centralization is a natural tendency in a free market. The biggest players find product-market fit, their capital enables them to build better products, they outcompete or squash any new products, they acquire any decent competitors, and they eventually corner the market. This is not inevitable. Anti-trust laws are the way we address this issue in the traditional world where the law is used to interfere with the market to maintain some balance.
Ethereum is a system that humans are building with code. While we build, we watch these market forces test the limits of the system and we build to accommodate the nature of how these operate, in order to build a system that operates optimally taking those forces into account. A decentralized Ethereum is an optimal Ethereum.
Centralization in Ethereum today
At the moment, there are a few places where stake is concentrating and it presents a risk to Ethereum’s credible neutrality. Credible neutrality refers to an entity’s inability to discriminate against or favor any person or group of people. Stake concentrated in the hands of a few operators, or in the hands of operators under one umbrella is a threat to that credible neutrality.
Lido is semi-decentralized, permissioned staking protocol that currently occupies this role. Permissioned means that validators need to apply to become an operator with Lido and, as of now, very few operators have been onboarded. When users deposit to Lido, they deposit to validators run by 29 operators running 32% of all staked ETH. In comparison, a comparable decentralized protocol, Rocket Pool, has over 2000 operators who control 2% of all staked ETH.
The argument that Lido espouses in favor of having a small, permissioned operator set is that the validators are professionally run and have a higher participation rate and higher uptime. However, EthStaker’s position is that this small operator set and the influence that Lido could exert over their operators represents a threat to Ethereum’s credible neutrality. This is why we currently discourage deposits to Lido.
*A more nuanced and technical explanation can be found here.
What is MEV?
MEV is ‘maximum extractable value’ and is created by the way that new transactions are incorporated into Ethereum. A very simple explanation is that transactions on Ethereum get put into a waiting room for seconds before they get picked up and put on the blockchain.
Very sophisticated bots responsible for giving these transactions to validators are able to quickly change the order in which they’re processed or add in their own transactions that change the price of something before or after someone else’s transaction in order to create opportunities for more value. These sophisticated bots pay validators a fee, usually proportional to the MEV opportunity, for the validator to accept that bot’s transactions instead of another bot’s.
What risks does MEV create?
The ethics of MEV are questionable, but it’s an unintended side effect that exists and researchers are trying to find the best way to mitigate the problem that it causes (or a way to get rid of it altogether). There are lots of solutions and mitigation techniques in the works, but that’s a whole area of research you can look into later. Some key terms if you’d like a research starting point: Proposer-builder separation (PBS), mev-boost, MEV Blocker
Part of the reason that Lido, a staking provider running an alarming percentage of all staked ETH, continues to get so many deposits is that their APR is currently higher. This is partially because MEV is random and operators like a lottery and represents another vector of centralization where larger entities get higher rewards. MEV rewards are a type of execution layer reward and execution layer rewards are pooled in Lido’s validator set. Meaning: the more validators, the higher the chance of winning lottery tickets, and those lottery tickets are split among all Lido stakers. This is compounding problem - the higher the APR at Lido, the more people will want to stake with Lido. The more people stake with Lido, the higher the APR. This is a centralizing force that becomes a concern very quickly and has been the subject of much discussion.
If we want the opportunity to be able to build Ethereum to be sustainable, we have to advocate for best practices until researchers can research, develop, test, and implement ways to inherently incentivize behavior that leads to a healthier Beaconchain.
This is, by no means, an exhaustive list of issues that directly affect the future of staking on Ethereum, but they encapsulate some of the big ideas that are open areas of research with no definitive answer at hand yet.
The next post
The next post’s topic is “Factors that should play into your decision to stake or not”. It will cover potential motivations to stake, the amount of work involved in staking, slashing risks, how much you can earn, and offline penalties.
Bankless: “What is MEV and why is it important?” (video)
Danny Ryan: “MEV, pandora’s box” (article)
As always, if you find any inaccuracies in these blog posts, please contact nixo and let her know so she can hastily correct them.