As Ethereum continues its journey towards scalability and decentralization, the challenges associated with staking have evolved. Validators play a crucial role in securing the network, but the increasing complexity of protocols and the rise of institutional participation demand more robust and flexible solutions. Distributed Validators (DVs) present a promising path forward by enabling validators to operate across multiple nodes, enhancing resilience, and reducing the risk of slashing.
In this article, we explore the catalysts driving the growth of Distributed Validators, the direct impact of security on node operator profitability, and the performance of DVs on Ethereum mainnet. We can appreciate how DVs contribute to a more secure and efficient Ethereum network by understanding these dynamics.
1. Fueling the Growth of Distributed Validators
The adoption of Distributed Validators is influenced by significant developments in Ethereum’s roadmap and the evolving landscape of network participation.
Advancements in the Ethereum Roadmap
The Ethereum roadmap includes several essential proposals aimed at improving scalability, efficiency, and censorship resistance. While these upgrades bring substantial benefits, they also introduce challenges for validators.
EIP-7251: Increase in Maximum Effective Balance of Validators
Currently, validators operate with a maximum effective balance of 32 ETH. EIP-7251 proposes increasing this limit to 2048 ETH, allowing validators to manage larger stakes and reducing the total number of validators needed. While this change can enhance network efficiency, it further increases the importance of individual validators.
EIP-7547: Inclusion Lists
Inclusion Lists aim to bolster censorship resistance by enabling block proposers to specify transactions that must be included in subsequent blocks. This mechanism empowers proposers to ensure the inclusion of critical transactions, mitigating the risk of censorship by specialized block builders. However, it adds complexity to validator operations, as they need to process and manage these lists effectively.
EIP-7732: Enshrined Proposer/Builder Separation
Enshrined Proposer-Builder Separation formalizes the division between block proposers and builders within the Ethereum protocol. By trustlessly allowing validators to outsource block construction to specialized builders, ePBS can improve network efficiency and enhance MEV (Maximal Extractable Value) extraction. However, it introduces new roles and responsibilities, increasing operational complexity due to additional protocols and interactions.
Validators are becoming more critical as their duties are fine-tuned, and Distributed Validators allow them to operate with improved safety and liveness. DVs enhance fault tolerance and allow validators to manage increased workloads and complexities more effectively. By leveraging DVs, validators can remain resilient and performant even as the network evolves.
Institutions Propel Distributed Validators into the Mainstream
The approval of Ethereum Exchange-Traded Funds (ETFs) represents a significant advancement toward broader institutional participation, further bolstered by recent political shifts in the United States favoring the industry. This favorable regulatory environment increases the likelihood that staking will become an integral feature of these financial products. Institutions have always prioritized stability and security alongside potential yields. So, when staking is introduced to Ethereum ETFs, Distributed Validators will likely emerge as candidates to meet their stringent requirements.
According to a recent Blockworks survey, over 61% of institutional respondents expressed willingness to pay a premium for the security benefits provided by DVs. With institutional interest on the rise, ensuring the security and profitability of node operations becomes even more critical; this heightened institutional involvement can inject additional capital into the ecosystem on the condition that staking infrastructure is sufficiently safe and robust.
2. Understanding the Direct Impact of Security on Node Operator Profitability
In Ethereum staking, security, and profitability are intrinsically linked. Security breaches, slashing events, downtime, and key rotation issues immediately impact a node operator’s profit and loss statement. Robust security measures are, therefore, fundamental components of a node operator's financial strategy.
Minimizing Risks with Reduced Slashing and Downtime
DVs are crucial in mitigating the risks of slashing and downtime, ensuring continuous operation, and maximizing staking rewards. For example, Obol’s DV clusters have maintained a perfect record with zero slashing incidents. The losses to node operators in the past three years that could have been avoided with the implementation of DVs are noteworthy:
Downtime: 12 incidents totaling 91 ETH
Slashing: 5 events totaling 333 ETH
Key Vulnerability: 2 events totaling 460 ETH of missed rewards
Total Avoidable Lost Income: 883 ETH ($2.65M at $3k/ETH)
With proposals like EIP-7251 increasing the maximum effective balance of validators, the financial impact of downtime or slashing incidents could escalate further. This emphasizes the importance of validators protecting their operations with a Distributed Validator setup.
Cutting Costs with Smarter Validator Operations
DVs introduce fault tolerance, protecting a validator against the failure of less than one-third of nodes in a DV cluster. DVs, therefore, reduce the necessity for a DevOps engineer to be on constant standby to address unexpected downtime. This decreased reliance on specialized personnel leads to direct savings in operational expenses and increases peace of mind.
Optimizing node operations and consolidating the node count can also reduce infrastructure costs without compromising performance. For instance:
Traditional Setup: A system with ten nodes and three backup nodes may cost approximately $2,600 per month, assuming $200 per node for bare-metal servers.
DV Cluster Setup: Transitioning to a seven-node DV cluster can reduce the cost to $1,400 per month.
Streamlining Rewards Distribution with Attributable Flows
Obol has introduced a suite of smart contracts known as Obol Splits to simplify and streamline the reward distribution process for validators. Here's how they contribute:
Withdrawal Recipients: These contracts differentiate between the principal amount and the rewards flow, ensuring operators receive their earnings without affecting the principal amount.
Split Contracts: They facilitate the division of Ether among multiple parties, promoting fair and transparent distribution among the node operators of a multi-party DV cluster.
Split Controllers: These provide the flexibility to adjust reward allocations as needed, allowing for responsive management of stakeholder interests.
By automating reward distribution and reducing manual intervention, these non-custodial tools minimize the risk of errors and disputes. Operators can manage rewards more effectively, fostering trust and collaboration within validator groups. For more details, you can explore Obol's Documentation on Splits.
3. Showcasing Distributed Validator Performance on Ethereum Mainnet
Having looked into Distributed Validator’s growth catalysts and their impact on security and profitability – we now turn to performance. An equitable lens to look through is Lido’s SimpleDVT Module, which battle-tests DV technology at scale on Ethereum mainnet while utilizing both Obol and SSV Network implementations.
In the table below, we look at Lido SimpleDVT’s RAVER scores across the last 30 days. Obol’s clusters have outperformed both SSV and Lido’s curated set over the time period. At a 97.96% average RAVER score, it also outperformed the network average over the same window.
Outside of Lido’s SimpleDVT module, Obol has made significant strides in adoption, with over 500 unique operators, including many independent “squad stakers”.
Obol has recently released a dashboard giving a comprehensive overview of crucial ecosystem metrics. They are currently taking in a large amount of stake from Lido and EtherFi, each of whom pledged $1 billion in Total Value Locked (TVL) to Obol.
The progress of Obol demonstrates how DVs can enhance performance while maintaining security at scale.
Conclusion
The evolution of Ethereum brings both opportunities and challenges for validators. The need for robust, secure, and efficient staking solutions becomes paramount as the network grows in complexity and scale. Distributed Validators offer a compelling response to these needs by enhancing security, reducing operational costs, and improving overall network resilience.
By adopting Distributed Validators and leveraging tools like Obol Splits, node operators can navigate the increasing demands of the Ethereum ecosystem more effectively. This not only safeguards their profitability but also contributes to the health and decentralization of the network.
As we look toward the future, embracing innovations like Distributed Validators will be crucial in realizing Ethereum's full potential as a decentralized platform capable of supporting various applications and services.
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