This research report has been funded by Obol. By providing this disclosure, we aim to ensure that the research reported in this document is conducted with objectivity and transparency. Blockworks Research makes the following disclosures: 1) Research Funding: The research reported in this document has been funded by Obol. The sponsor may have input on the content of the report, but Blockworks Research maintains editorial control over the final report to retain data accuracy and objectivity. All published reports by Blockworks Research are reviewed by internal independent parties to prevent bias. 2) Researchers submit financial conflict of interest (FCOI) disclosures on a monthly basis that are reviewed by appropriate internal parties. Readers are advised to conduct their own independent research and seek advice of qualified financial advisor before making investment decisions.
Distributed Validator Technology and Obol's Contributions Program
Key Takeaways
- The Obol Collective launched a contributions program which allows all stakers to stake on distributed validators (DVs) and earn access to future governance and ownership of the Obol Collective.
- By staking ETH on DVs, users enhance the security and resiliency of Ethereum, and therefore improve the network’s decentralization properties.
Distributed Validator Technology (DVT) and Obol’s Contributions Program
Distributed validator technology (DVT) allows a validator to operate across multiple nodes, enabling more decentralized node operations. This means one Obol DV can leverage multiple clients, multiple locations, and multiple node operators. Essentially, multiple node operators work together in a cluster—running distinct nodes that communicate with each other—and reach consensus to perform validator duties.
Thus, DVT greatly increases the availability, security, and client diversity of Ethereum’s validator set, mitigates a range of staking risks such as correlated slashing, and lowers the barrier of entry for smaller node operators by allowing them to split the 32ETH staking bond.
With the launch of the Obol Contributions program, for the first time, anyone staking ETH can directly participate in the Obol Collective. Stakers who stake on Obol distributed validators (DVs) contribute 1% of their staking rewards to the Obol Retroactive Funding program (RAF). These funds will be redistributed to projects and innovations that scale and decentralize Ethereum infrastructure. In return, Obol DV stakers earn access to future ownership and governance rights in the Obol Collective. As more stake is deployed on Obol DVs, a positive flywheel will drive further value and increase monetary flows, funding and accelerating support for scaling Ethereum infrastructure.
There are a number of risks that ETH stakers and node operators must take into consideration. The Obol Collective has a strong chance to play a significant role in mitigating these risks by building credibly neutral infrastructure for DVs. Participating in the collective means directly influencing the decentralization of Ethereum.
DVT Strengthens Ethereum
In 2023, Ethereum missed 253 blocks due to an issue with the Prysm client, and earlier this year, a Nethermind client bug took down 8% of the network. Both situations reignited conversations around the risks of a supermajority client. In order to encourage client diversity, the protocol enforces higher penalties for correlated failures i.e. correlated slashing. Because one node operator is likely to use the same stack across many validators, this penalty is designed to prevent one single large actor from making mistakes that are more likely to be replicated across all its validators, e.g. stakers running a majority client can incur a total loss of their stake if the client has a bug, versus stakers running a minority client will only lose a moderate amount.
In addition, Vitalik suggests more sophisticated correlated slashing techniques are required to defend against more frequent misbehavior, such as missing an attestation. Hence, if you’re staking ETH, you should “run the majority client at your own peril!”
Currently, correlated slashing penalties begin when 1.10% of the network’s validators are being slashed and increase linearly from there, until over 33% of the network is being slashed, in which case the penalized validators lose their entire stake. Let’s say 25% of the network uses one client that has a bug – that means, 25% of the network’s validators would get slashed due to one client, resulting in each validator losing 25 ETH. This would result in 19.5% of all staked ETH being burned. Clearly, running the majority client and staking ETH to a validator running the majority client carry potentially significant risks to the security of Ethereum.
Nonetheless, staking ETH to one node operator is common practice. Yet, it is apparent stakers need to carefully consider to whom they allocate their stake, or risk getting their ETH slashed according to one entity’s node operations. For more information regarding correlated slashing and its risks, Liquid Collective and Obol published an extensive report and webinar.
Why DVT?
DVT infrastructure reduces correlation risk by making it easy to run a single validator across four or more different nodes, either by a single operator or multiple different operators joining together to form a cluster. As long as >66% of nodes within a cluster are operating normally, the validator will stay up. For example, in a ¾ threshold setting, one can go offline assuming the other three are operating properly. Therefore, the benefits of this infrastructure are two-fold: reaching network consensus is more diverse and therefore more resilient, and stakers who allocate their ETH to a DV are inherently diversifying their risk. Other benefits include geographical decentralization, reducing the network’s dependencies on any single entity’s node operations, and, notably, distributed key generation (DKG).
DKG is the process of creating validator keys across a group of cluster participants, without one participating having full access to the private key. This is beneficial for liquid staking protocols because with DVT, node operators will never store the entire validator keys in one place at any time–if one part of the DVs shard is stolen, the full key is not compromised.
In October 2023, Lido announced the deployment of a Simple DVT Module, in which they targeted 0.5% of the Lido stake. In May, another proposal was passed to expand the module and increase the threshold to 4% of Lido stake, showing promising performance and adoption of DVT from Ethereum’s largest liquid staking protocol. Obol has also deployed restaked DVs to EtherFi’s network, indicating DVs will also strengthen and extend resilient consensus to additional out-of-protocol services.
Final Thoughts
DVT strengthens Ethereum decentralization because DVs diversify node operations across a cluster of nodes, rather than localizing staking risks to any single node or large operator entity. Obol Contributions marks the beginning of decentralizing the Obol Collective, and we're excited to see this development because in the long run, we believe valuable chains will be increasingly decentralize.
Resources
Exploring Ethereum's Correlation Risk
The Missing Piece: the Need for Risk-Adjusted Rewards in Staking
Correlated slashing: a case for diversification
Obol Labs Forms Industry Group to Push for Decentralized Validator Technology
Lido Tests of Distributed Validator Technology
Exploring Ethereum's Correlation Risk
This research report has been funded by Obol Labs. By providing this disclosure, we aim to ensure that the research reported in this document is conducted with objectivity and transparency. Blockworks Research makes the following disclosures: 1) Research Funding: The research reported in this document has been funded by Obol Labs. The sponsor may have input on the content of the report, but Blockworks Research maintains editorial control over the final report to retain data accuracy and objectivity. All published reports by Blockworks Research are reviewed by internal independent parties to prevent bias. 2) Researchers submit financial conflict of interest (FCOI) disclosures on a monthly basis that are reviewed by appropriate internal parties. Readers are advised to conduct their own independent research and seek the advice of a qualified financial advisor before making any investment decisions.
The information contained in this report and by Blockworks Inc. and related affiliates is for general informational purposes only and is not intended to provide legal, financial, or investment advice. The report should not be construed as an offer or solicitation to buy or sell any security, token, or financial instrument and does not represent any recommendation or endorsement of any investment or financial product or service. Blockworks Inc. and related affiliates are not registered as a securities broker-dealer or an investment advisor in any jurisdiction or country.