It’s an exciting time for Ethereum staking! One ambitious proposal—aptly named EIP-7251—is inspiring robust debate about the right way to do it. This proposal goes a step further, proposing to raise the maximum effective balance for validators, with dramatic implications for the network’s decentralization. Our friends at KnowingCoin.com have a great explanation of what all of this means. Here’s our take on the opportunity and the threat—the glass half full, the glass half empty.

The total number of ETH staked is continuing to climb. By mid-September 2024, total staked ETH had increased by 27%, surpassing over 34.7 million ETH. Staking activity has increased significantly in parallel with the number of validators securing the Ethereum network. In just the last month since September 2023, the number of Ethereum validators has increased by more than 30%, recently exceeding one million active validators. This increase is a clear indication that interest in staking is on the rise. They view it as a good way to generate rewards and contribute to network security.

The Allure of Increased Staking Caps

One of the loudest arguments for raising staking caps has been the promise of deeper institutional adoption. Institutions want to participate in staking, but they require a level of structure, liquidity, and streamlined processes that institutions can rely on. Alongside this, they need real-time PnL tracking, performance history and risk analysis tools. Higher staking caps will only do more to entice these players to enter the Ethereum staking ecosystem.

This increased institutional participation comes with cause for concern. Others worry that raising staking caps would lead to further centralization. This amendment would enable a handful of validators to maintain a much bigger share of the network. Such centralization would compromise Ethereum’s security, which is based on decentralization, just as with Bitcoin’s Proof of Work (PoW) security.

Distributed Validator Technology (DVT): A Decentralization Safeguard

Thankfully, answers are being crafted to address these centralization dangers. One of the most promising technologies to emerge recently is Distributed Validator Technology (DVT). On Ethereum, DVT allows to further decentralize who runs and manages nodes. It opens the door for validators to be run collectively, instead of a single operator with thousands of validators. This complicates the ability of those wishing to do harm with single points of failure and increases the resilience of the entire network.

How DVT Works

DVT utilizes a number of innovative strategies to reach their objectives. Like all good Ethereum inventions, it uses multiparty computation (MPC) to generate the full validator key in secret. It employs Shamir’s secret sharing to divide a single key into operational components. No one operator has a clue to the whole key. This configuration increases the difficulty for bad actors to hack into the validator. DVT provides a wide array of operator configurations. This is to say that despite a failure on the part of one operator, the remaining can still attest.

  • Shamir's secret sharing
  • Threshold signature scheme
  • Multiparty computation (MPC)
  • Consensus protocol
  • Istanbul Byzantine Fault Tolerance (BFT)

The Ethereum community is still trying to figure out how to square the desire for institutional adoption with the need for a truly resilient global network. While higher staking caps would open the door to greater institutional investment, they risk breeding greater centralization. As I’ve described above, DVT provides a key solution by making possible more decentralized validator operations.

Balancing Growth and Resilience

Staking pools further help reduce the barrier for smaller stakers through aggregation. To participate as a validator, you need a minimum of 32 ETH. By participating in a staking pool, users can pool their funds and take advantage of staking opportunities collectively. It is critical to select staking pools with an eye toward centralization, as some pools can be more centralized than others. Some investors use a diversification strategy and spread their staked crypto across more than one validator, while others go all in with one validator. This points to the importance of management to prevent a centralization of power.

Ultimately, the future of Ethereum staking will be determined by how well it strikes a balance between these competing forces. DVT and other decentralization technologies will be immensely important in maintaining Ethereum security and resiliency. This is particularly important as the network matures and expands. The addiction to ever higher asset prices has driven every speculative boom back in history. Increasing the diversity of the validator population is part of this answer to the realignment problem. Ethereum's security is rooted in decentralization, similar to Bitcoin's, which uses Proof of Work (PoW).

Ultimately, the future of Ethereum staking will depend on finding the right balance between these competing forces. DVT and other decentralization technologies will likely play a crucial role in ensuring that Ethereum remains a secure and resilient network, even as it grows and evolves. The dependency on asset price increases has been blamed for encouraging previous speculative runs, and a more diverse set of validators could help mitigate this issue. Ethereum's security is rooted in decentralization, similar to Bitcoin's, which uses Proof of Work (PoW).