How does the decentralized staking of Ethereum 2.0 work?

According to Golden Finance reports, on July 26, the number of Ethereum 2.0 validators exceeded 200,000, and the amount of ETH contract pledges exceeded 6.4 million.

These huge amounts of collateral assets will start on December 1, 2020. Because the Phase 1 of Ethereum 2.0 has not yet been launched, it has only been growing and not decreasing.

So how did the tens of billions of dollars of Ethereum be mortgaged into the contract? The Ethereum official has previously launched an official mortgage tutorial, which needs to be mortgaged by downloading the Ethereum client. In addition to the official Ethereum, there are many channels for mortgages.

For example, kraken, coinbase, binance of exchange channels, staking tool stakefish, Ethereum mortgage agreement Lido, etc.


The picture above shows Lido’s analysis of the mortgage data of the Ethereum beacon chain. From the data above, it can be seen that unknown accounts for 48% of the current proportion of verifiable ETH mortgages. Most of these come from the official Ethereum client. The exchange accounted for 29.3%. Others represent some centralized staking tools. In the end, the percentage of mortgage instruments that used the Lido protocol was 9.6%.

Users’ trust in decentralized tools is more conducive to the future mortgage work of the Ethereum beacon chain. In this article, we will describe Lido’s mortgage services in detail. The main content comes from the articles published by Lido on the official blog.

Although users have pledged huge amounts of assets in Ethereum, the service still has several shortcomings:

1. Non-cancellable mortgage: Once deposited, mortgagers cannot withdraw their assets before enabling transfer from the beacon chain.

2. Insufficient liquidity: After mortgage, users cannot transfer, trade or use their ETH as collateral in DeFi.

3. High capital requirements: users can only pledge multiples of 32 ETH.

4. Operational burden: Although the core developers of Ethereum ensure that Staking has low hardware and uptime requirements, many users are more willing to provide funds and outsource operations to a third party.

And Lido provides a solution. But when the service was first launched, decentralized services were not used directly, but a transition was adopted. Enable Lido to compete with exchange pledges and seize market share.

The current status of Lido is:

Deposits before July 15, 2021 are not non-custodial; when the new Lido was subsequently launched, the smart contract was not set as the owner of the beacon chain validator. Therefore, the withdrawal certificate of Lido validator is controlled by 6 multi-signatures of 11 reputable Ethereum builders. We have converted escrow to smart contracts, but this cannot yet be extended to existing deposits.

Withdrawals are currently not without permission: due to the way the withdrawal voucher is designed, Lido validator currently has to cancel the mortgage manually. Therefore, stETH holders cannot force Lido node operators to cancel mortgages, and must trust them to act honestly.

Becoming a node operator does not currently require permission: only the Lido registry controlled by the LDO token holder can be added as a new node operator. Therefore, stETH users believe that LDO holders will continue to maintain a reasonable and well-distributed set of validators.

Withdrawal from the beacon chain has not been enabled, so no one (including 6-of-11 multi-signature) can withdraw funds from the deposit contract. This also means that stETH holders are currently unable to claim ETH from the beacon chain.

We need to know why we cannot withdraw money. Because of the withdrawal certificate problem of the beacon chain, there is only one type of withdrawal certificate at the beginning of the Ethereum mortgage, which is called 0x0. This only allows the BLS address type to become the owner of the validator. In December 2020, it was introduced to allow the 0x01 Ethereum address to have the validator. However, to switch the withdrawal certificate of the existing validator, you must first cancel the mortgage of ETH, and then use the new certificate to re-mortgage.

However, it is not possible to re-collateralize unsecured ETH before the withdrawal is enabled. So to switch from 0x0 to 0x01, you need to allow the verifier to switch their withdrawal credentials.

The upgrade of Lido’s smart contract withdrawal voucher took place on July 15, 2021. Any new deposits made after this are completely non-custodial.

If the user wants to cancel the mortgage today (although ETH can neither be withdrawn nor remortgaged), Lido will have to send a message to the verifier. Then, the validator must manually cancel the mortgage, which may cost Lido. In order to alleviate this situation,

Ideally, Lido will completely solve the problem by allowing stETH holders to remotely trigger withdrawal from the beacon chain. Recently, Ethereum researchers put forward a new proposal that will enable clients to force their clients to cancel their mortgages. The temporary mark is 0x03, which can be implemented as an independent voucher, or as an amendment to 0x01 after the beacon chain is revoked.

The proposal works by introducing new “standard” exit contracts (such as deposit contracts) on Ethereum. 0x03 The owner of the withdrawal voucher will specify any validator with matching withdrawal voucher. The beacon chain will then trigger the “voluntary withdrawal” of the verifier as part of the state transition function of the beacon chain.

However, when this function is not enabled, node operators are still required to deal with the cancellation of mortgage operations.

The core part of Lido’s value proposition is liquid pledge, which is the issuance of stETH derivatives based on users’ deposits. In a simple implementation, derivatives issued for different validators should be traded at different market prices because their performance and reliability are different. However, the resulting tokens cannot be substituted for each other, which makes it more difficult to establish liquidity for them.

On the contrary, Lido users get the same replaceable stETH tokens from their deposits, allowing exchanges, lending markets, etc. to use them.

Here is a list of some possible solutions:

Central registration + off-chain reputation: Only top node operators with good records and legal recourse are allowed, and they can be voted by LDO governance.

Registry managed by Stakers: Allows Stakers to choose a collection of node operators.

Binding: A method used by other blockchains (such as Tezos) and other equity pools (such as Rocket Pool) requires a binding account of the verifier.

Secret Shared Verifier: A new proposal pioneered by the Ethereum Foundation, called the Secret Shared Verifier (SSV). SSV splits a single verifier into multiple signatures controlled by different entities. Then, these entities will first reach a consensus through an off-chain voting agreement to jointly produce blocks. Although there will be higher communication overhead, a single validator cannot cause collective failures because it can only control 10% of the validators.

Tracking verifier performance: If you can track the verifier’s performance within the protocol, and use this information to allocate ETH in the system. Node operators that can be designed with better performance have a higher chance of getting new ETH into the system. The system can delete the worst performing validator.

Insurance: Lido can again outsource the quality control of validators to the market, for example, by having a public insurance system. This will actually be a prediction market, and Lido pays rewards to predict which validators will have the best monthly performance.


Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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