Lido Tests of 'Distributed Validator Technology' Portend 2024 Decentralization Push

For years, Ethereum developers have been hard at work on one of the network's gravest security risks: thousands of validators operate the second most valuable blockchain, but just a few of them have almost all of the power.

Every 12 seconds, a new block of transactions is added to Ethereum. Those blocks are added by validators, which could be companies, individuals or collectives that lock up, or "stake," at least 32 ETH (currently aboout $70,000 worth) in exchange for a steady yield.

Lido, the collective that is the biggest validator on Ethereum, controls 32% of all staked ETH. If this share grows by just a couple of percentage points – creeping past the 33% threshold required to block a 67% supermajority of validators – network outages or deliberate malfeasance at Lido could have massive ramifications for Ethereum as a whole.

This vulnerability stems from the "centralized" nature of most validators; virtually all validators are just individual computers (or servers) loaded with one of a few popular node-running softwares. If there are bugs in the software – or if a computer falls offline – or if the person operating a big validator decides to act dishonestly – then the entire network might suffer.

Distributed validator technology, or DVT, aims to put these risks into the past. Projects that use the tech like Obol, SSV and Diva help validators spread their operations between several parties, ostensibly as a way to make validators more resilient and less subject to single points of failure.

DVT solutions have been talked about for a while, but even as some long-awaited DVT platforms are finally going live, their overall adoption remains low. By Obol's estimate, less than a single percentage point's worth of staked ETH is controlled by DVT-based validators.

In 2024, that could all change. Leaders in the DVT space are finally putting the finishing touches on their platforms, and Lido could soon transition some of its operations into the hands of distributed infrastructure.

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The big selling point of blockchain networks is that they are "decentralized." Ethereum's validator system – which spreads power between parties according to how much ETH they stake – is the main way it remains resilient to outages and stays "credibly neutral," meaning it's theoretically immune to the whims of companies or governments.

But just a few validators, including those run by Lido, have gradually amassed a lion's share of the power over the network.

Lido's market presence grants it a huge amount of sway over how transactions are added to the chain because validators ultimately choose which transactions are written to Ethereum and in what order.

Even more troublingly, should Lido or any other validator ever amass 33% of all staked ETH, it will have the ability to meddle with how the chain reaches consensus. If Lido goes offline or decides to attack the network once it passes this critical threshold, it could, in theory, put the brakes on all network activity.

The prospect of network attacks and unfair distribution of power have always loomed larger over Ethereum. The ecosystem has historically prided itself on operating with a relatively high degree of decentralization, and it shifted from a Bitcoin-esque mining system to its present-day staking regime in part to help further democratize control over the network.

But as certain stakers – and Lido, in particular – have amassed more and more control over the Etheruem network, DVT has been looked to as a possible saving grace.

"It all goes back to the ethos of Ethereum," said Alon Muroch, founder of DVT firm SSV, which offers a network that validator operators can use to split up control over their infrastructure. "People don't want to be dependent on a single entity. I think that ethos is very strong."

While no two DVT solutions are exactly alike, they generally work similarly, by splitting the "keys" to a given validator across several different nodes. A consensus of key holders needs to sign off on decisions over how DVT validators operate, and if one key holder goes offline, others can fill in to keep things running.

A benefit to this setup is the added resiliency.

"Today validators are single-engine planes. If a validator goes down, it's offline," said Brett Li, head of growth at Obol Labs, which is also building a network to distribute validators. With DVT, "It's redundancy. You can have two engines, and if one of the engines fails, you can still get where you need to go safely."

With product launches and testnets this year from Obol, Diva, SSV and others, long-simmering hopes for a more decentralized Ethereum validator network are finally nearing production.

In November, Lido took a first step toward transitioning to DVT with the introduction of its "Simple DVT Module." Lido takes deposits from users and distributes them across third-party validator operators. With the new DVT module, which is being tested in partnership with Obol and SSV, Lido's third-party validators can become decentralized – blunting the ability for Lido, which ultimately controls its validators today, to exert undue pressure on them.

The ambitions for DVT operators don't end with Lido.

"If the milestone with Lido succeeds, then it's gonna be the standard for everyone, because Lido is the biggest," said Muroch." If Lido makes the move, then others will make the move."

It could take some time for Lido to transition its validators to DVT, or for wider infrastructure operators to feel comfortable adopting the technology. Validators run by big institutions might continue to run their validators fully in-house – comfortable with the software and maintenance required to keep a validator node afloat, and reticent to adopt new tech that could impinge their flexibility.

But hobbyist "solo-stakers" and community-run collectives like Lido, which continue to account for a large overall proportion of all staked ETH, might soon embrace DVT as a result of its easy setup and ideological underpinnings.

"In two or three years you'll see hopefully between a third or half of validators running on DVT," Muroch estimated. Obol's Li offered a similar near-term prediction, and said that in the long-run he expects "80%" of validators to run on DVT-based infrastructure.

Correction (Dec. 21, 12:43 UTC): Corrects SSV founder Alon Muroch's name and title.