Vitalik’s Secret Sauce: The Next Level of Ethereum Staking Decentralization!

Last Updated on March 28, 2024

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Key Takeaways:

  • Innovative Penalty System:¬†Vitalik Buterin proposes a novel penalty system aimed at enhancing Ethereum’s decentralization by penalizing correlated failures among validators. This system targets validators controlled by single entities that fail simultaneously, applying steeper penalties to discourage such correlated failures.
  • Encouragement of Solo Staking:¬†The proposal is designed to level the playing field between large stakers and individual validators. By imposing scaled penalties based on the rate of failure deviation from the norm, the new system aims to make solo staking more economically attractive and viable, thereby promoting decentralization.
  • Challenges in Staking Pool Dominance:¬†Despite these efforts, the proposal does not address the high entry barrier for solo stakers, set at 32 ETH. Large staking pools and liquid staking services like Lido continue to dominate, holding a significant portion of Ethereum’s staked ETH, which raises concerns about centralization and the potential for disproportionate influence within the ecosystem.

Ethereum’s co-founder, Vitalik Buterin, has put forward a novel approach to promote enhanced decentralization within Ethereum’s ecosystem.

This method specifically targets improving the decentralization of staking by introducing penalties for what’s termed as¬†correlated failures¬†among validators.

Buterin unveiled his ideas in a detailed post on March 27, aimed at the Ethereum Research forum.

His proposal centers on intensifying the incentives for anti-correlation in staking practices.

The essence of his suggestion is that validators under the control of a single entity, which fail simultaneously, would incur a significantly steeper penalty compared to those failing independently.

Ethereum power

This approach hinges on the premise that large entities controlling multiple validator identities are more prone to replicate errors across all controlled validators.

Buterin pointed out a common issue among validators, particularly those grouped in staking pools, where correlated failures are likely due to shared operational infrastructure.

Under Buterin’s proposal, penalties would scale with the extent to which a validator’s failure rate deviates from the norm.

A conceptual image of a hand reaching out , holding a Ethereum, blending digital and real worlds

This means that during instances where a significant number of validators fail at the same time, the penalty levied on each failing validator would increase.

Simulations have indicated that this method could potentially diminish the competitive edge that larger stakers hold over smaller ones, as the former are more susceptible to causing widespread failures due to their correlated nature.

The proposed model aims at incentivizing a move towards decentralization by encouraging the maintenance of distinct infrastructures for each validator, thereby making the concept of solo staking a more viable and economically attractive option compared to participating in staking pools.

ethereum virtual currency images.
Source: akif – stock.adobe.com

Additionally, Buterin has floated other ideas, including varied penalty mechanisms to further reduce the comparative advantage of larger validators and to explore the implications for geographic and client software decentralization.

However, Buterin did not discuss adjusting the current requirement for solo staking, set at 32 Ether (ETH), equivalent to approximately $111,500 at the time of writing, which stands as a significant barrier to entry for individual stakers.

Staking pools and liquid staking services, like Lido, continue to attract users by offering the opportunity to stake smaller amounts of ETH.

Lido, for instance, holds $34 billion in staked ETH, representing about 30% of Ethereum’s total supply.

The dominance of such services and the resulting concentration of staking power have been a point of concern for Ethereum advocates and developers, who warn against the potential for disproportionate profit extraction and the risks of “cartelization” within the ecosystem.

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