Lemniscap Spotlight: Why we are investing in Puffer

Since Ethereum’s successful shift to Proof-of-Stake with the Merge and after the recent Shapella upgrade, we have observed a notable spike in staking, primarily due to the authorisation of staked ETH withdrawals. Various protocols have benefited from this burgeoning staking demand, particularly once withdrawals became operational. This has also triggered a considerable increase in validator count.

There is a defined limit on how much ETH can be staked, and a limit on how many staking withdrawals can be initiated within an epoch which lasts ~6.4 minutes. This is known as the churn limit and it serves as a guardian of the network’s stability. At present, the queue for entry into the staking ecosystem is experiencing a wait time of 33 days, which is a clear indication of the growing interest in staking. In contrast, the exit queue stands at zero, further exemplifying the high demand and participation in staking.

Traditional finance offers yield-bearing assets like treasury bonds, forming a base for numerous financial products. Prior to staked ETH, such a foundational yield-bearing asset was missing in DeFi. Now, staked ETH has emerged as a pivotal financial instrument in DeFi. Over time, liquid staked versions of ETH may well replace standard ETH in protocols, due to their enhanced flexibility, composability, and interoperability within the DeFi space.

Running a solo node presents technical challenges and substantial capital requirements, often beyond the reach of an average user. Liquid staking protocols offer an alternative, allowing a larger audience to participate in the staking process while maintaining the liquidity of staked assets. This lowers the barrier to entry compared to conventional staking methods.

One can, with a capital of 32 ETH, engage in validation, though such high financial prerequisites naturally favour institutions, precipitating an inherent skew towards centralisation within the validator pool.

The emergence of Liquid Staking Derivatives (LSDs) has only exacerbated this issue, culminating in a validator pool dominated by a small coterie of entities possessing an unparalleled level of control over Ethereum’s blockspace. Regardless of their underlying motives, these entities might find themselves in a position where they are forced to censor transactions, posing a grave threat to Ethereum’s core proposition of unassailable neutrality.

Following the Shapella upgrade, liquid staking protocols such as Lido have witnessed substantial growth, outperforming other options including centralised ones and other staking pools. Lido, in particular, has emerged as the front-runner among decentralised alternatives, commanding a significant 31.7% market share, far surpassing competitors like Coinbase, Binance, Figment and others.

Even if we disregard the centralised options, Lido controls a dominating 86% of total market share. Liquid Staking Derivatives (LSDs) have indeed become the largest source of Total Value Locked (TVL) across the entirety of DeFi. Despite their popularity, LSDs introduce several risks. Most notably, they can’t safely exceed consensus thresholds without posing a significant threat to both the Ethereum protocol and pooled capital.

Lido already exceeded the 15% upper bound limit posed by Vitalik. It appears that they don’t intend to enforce any self-imposed restrictions either. Indications from members of the Lido DAO suggest an intention to sustain the platform’s market leadership. When a proposal to self-limit was tabled, it was overwhelmingly rejected, with 99.81% of participants voting against it. The clear message from Lido’s stakeholders is a commitment to maintain and potentially extend their market dominance.

Puffer built on EigenLayer, addresses the prevalent challenges in the LSD space through the incorporation of their unique Secure-Signer technology, a remote signing tool specifically designed to bolster validator security and mitigate slashable offences. It dramatically reduces the validator bond requirement from 32 ETH to a more achievable 2 ETH, whilst ensuring robust protection for validator keys and minimising the risk of slashing due to user errors.

With the introduction of Secure-Signer, validators of all sizes are encouraged to contribute to the Ethereum network’s security via the Puffer Pool. The protocol implements innovative solutions such as the Permissionless Delegated Threshold Validator (pDTV) and Secure-Router for efficient inactivity management and effective transaction delegation, respectively.

To prevent possible slashes through double-signing, the Secure-Signer generates and safeguards all BLS validator keys inside its encrypted and tamper-proof memory. These keys can only be accessed during runtime and remain encrypted at rest, making them inaccessible to the NoOp unless used to sign non-slashable block proposals or attestations.

Given that the keys are securely encrypted and bound to the Secure-Signer, they are safeguarded against misuse across multiple consensus clients, thus shielding the NoOp from unintentional slashes attributed to double-signing. Furthermore, should their system come under attack, the keys are duly protected from hackers.

The integration of SGX delivers a stringent security improvement, safeguarding honest NoOps against slashable offences. In the rare instance of a malicious NoOp breaching SGX, they merely discover their own validator private key, leaving the pool’s security uncompromised. Remote Attestation Verification (RAVe) confirms that NoOps are employing Secure-Signer, thus cultivating an environment of trust and transparency throughout the ecosystem.

Puffer also levies only a modest 2.5% protocol fee. This is significantly lower compared to Rocketpool’s 15%, Lido’s 10%, Frax Eth’s 10%, and Centralised exchange staking services, which can charge up to 25%.

As Ethereum maintains its stride towards wider adoption via the integration of ZK-rollups, Puffer is determined to bolster validators with additional income through its unique restaking services. This commitment ensures that smaller validators can effectively compete against their large-scale institutional counterparts.

Additionally, Puffer has made strides to ensure alignment with Ethereum’s long-term goals. Right from the outset, Puffer is devoted to capping its pool size at 22% of the validator set. This decision means that, regardless of how substantially the pool grows, it will never pose a threat to Ethereum’s consensus thresholds.

Achieving a decentralised distribution of ETH stakers is bound to be a progressive struggle amongst various protocols, each vying to secure their unique position in the space. Puffer is steadfast in its objective to fill this gap.

Puffer is led by Amir Forouzani, former Lead Engineer at NASA’s Jet Propulsion Lab, and Jason Vranek, a PhD in verifiable computing, and has secured valuable advisory from Justin Drake and Dankrad Feist, Ethereum Foundation researchers, along with Allan Zhang, a blockchain security expert.

Puffer has received a grant from the Ethereum Foundation and has added Dankrad Feist and Justin Drake among the notable members of the DAO holding the keys to the SGX encryption.

This article is prepared for general information purposes only. This post reflects the current views of its authors only, which may be subject to change without this article being updated.

This article does not constitute investment advice, investment recommendation, or any solicitation to buy, sell or make any investment. This post should not be used to evaluate the making of any investment decision, and should not be relied upon for legal advice, investment recommendations, tax advice or any other similar matters.

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