Author: Javier Ron - Research @firstset
We began this series of posts by highlighting the potential dangers associated with node operators becoming excessively large and exacerbating centralization issues within Liquid Staking Protocols (LSPs). As we continue this series, we provide insights and strategies for smaller Node Operators (NOs) to grow and establish themselves in the network. At first glance, this might seem contradictory. However, it’s important to understand that by empowering new entities to become NOs, fostering their growth, and encouraging open discussions about operational strategies, we are actually working towards reducing the reliance on large node operators within LSPs.
This is the second part of a series about the current state and possibilities of node operation on Ethereum’s LSPs. You can find the first part here.
In the first part we discussed the motivation for NO decentralization in the LSP landscape, and listed the most relevant permissionless LSPs and their specifics.
In the second part of this series, we discuss the same permissionless LSPs in the context of starting as a NO, and point out what we gather to be the most relevant option. Furthermore, we discuss what we believe to be the best path for aspiring small- and medium-scale node operators to approach node operation.
Permissionless LSPs: Pros and Cons
Let’s recall the most relevant points of the LSPs described in the previous post. We do so from the NO perspective and focus on trust mechanisms. Keep in mind that Lido CSM is in testnet, and the mainnet configuration parameters are still not decided, and might change.
| Pros | Cons | |
|---|---|---|
| Lido CSM | - 1.3 ETH Bond as collateral | - Stake Concentration |
| Ether.fi | - Possibility of no bond - Part of DVT cluster |
- 2 week test period - Rewards distributed among DVT cluster participants |
| Rocket Pool | - Possibility of direct EL rewards/pooled EL rewards - RPL collateral rewards |
- 8 ETH self stake - RPL collateral |
| Stader | - Possibility of direct EL rewards/pooled EL rewards - SD collateral rewards |
- 4 ETH self stake - SD collateral |
| Puffer | - All rewards go to operator. - Possibility of 1 ETH bond |
- VT token management - Requires special hardware |
| Diva | - 1 ETH bond - Part of DVT cluster |
- Rewards distributed among 16 DVT cluster participants |
Lido CSM, has a reasonably low bond, and it can get even lower with an increasing number of validators. The main argument against CSM is centralization. Lido already controls a very large portion of stake, which makes Lido’s smart contract infrastructure a single point of failure.
Ether.fi offers a path to run a node operator without any bond, however you need to commit to run the validator for at least 2 years, and surrender your personal information. Furthermore, there is a 2 week test period, where you need to run a validator on testnet, so it is not truly permissionless.
Rocket Pool and Stader have both more complex setups, and higher ETH requirements. First you need to provide self stake of 8 and 4 ETH respctively; and an extra collateral in the protocols’ own tokens. Keep in mind that the amount of collateral required is measured in ETH, so that if the collateral that you provide depreciates, you need to provide more in order to keep earning the validation rewards.
Puffer also has a relatively complex mechanism where the node operator must pay one Validator Token per validator each day. While this is a great incentive to prevent “lazy” node operators, the price of the validator token dictates the final reward.
Diva provides a lower bond for entry, however participation in the relatively large DVT cluster dilutes the validation rewards.
In summary, all protocols have some sort of bond requirements, which as mentioned previously, boil down to a matter of economic trust between the LSPs and the aspiring node operators.
Lido CSM: The Most Accessible Option for Aspiring Node Operators
Among the available options, we believe that Lido CSM stands out as the most accessible for several reasons:
- Simplified bonding mechanism: No complex processes involving additional tokens
- Comprehensive documentation and support: Facilitates easier onboarding for new operators
- Strategy to reduce centralization: Moving stake from curated NOs to smaller, independent ones
This shift in Lido’s strategy offers two key benefits:
- Decreased protocol centralization
- Improved physical infrastructure decentralization (fewer validators per node)
It’s important to note that while Lido CSM was primarily designed for solo stakers, it presents an opportunity for aspiring node operators of various backgrounds. To manage this transition, Lido CSM will implement a permissioned Early Adoption period, preventing an influx of professional node operators.
Ultimately, when Lido CSM becomes permissionless, it will serve as a valuable entry point for new node operators to gain experience and establish their reputation within the Ethereum ecosystem.
Is there a path for growth for small/medium Node Operators?
For NOs looking for validation as a reliable source of income, the current trust mechanisms are not ideal. In particular, current bond requirements do not scale.
Consider this: running 300 validators requires an investment of approximately 390 ETH for bonds plus operation costs. With an optimistic annual return of about 28 ETH, node operation is not realistically sustainable.
To grow as an NO, one must secure bonding for far more than 300 validators. This necessitates addressing the trust issue from a different perspective. We envision two potential solutions:
- Building sufficient reputation could lead to lowered—or even eliminated—bond requirements, as liquid staking protocols develop trust in the operator.
- Accumulating comprehensive performance metrics over time could allow for quantification of inefficiency and slashing risks, potentially enabling the provision of bonds through insurance for a precise amount of ETH.
It’s crucial that reputation claims are supported by publicly disclosed data. The key to trust lies in meticulous, accurate, and transparent performance tracking, coupled with continuous sharing of engineering practices.
What is the path for aspiring middle-sized NOs?
Node operators should aim to build a strong and provable reputation of technical proficiency. Ideally, we want to build it in a cost-effective way.
Public Disclosure of Technical Aspects of Operation
Transparency is a cornerstone of building trust in the node operation ecosystem. It is imperative that all technical aspects of operations, except sensitive information, are comprehensively disclosed to the community. This level of openness not only demonstrates a commitment to accountability but also allows for peer review and continuous improvement. By sharing detailed information about their infrastructure, processes, and performance metrics, node operators can establish credibility and foster a culture of collaboration within the Ethereum network.
Tools
Tools developed in-house should be made available as open-source software, allowing for thorough community review and potential contributions. This practice demonstrates transparency and also fosters collaboration and continuous improvement within the ecosystem. By sharing their custom-built tools, NOs can showcase their technical expertise and commitment to the broader community.
The use of outsourced tools should be clearly and transparently disclosed. Node operators should provide detailed information about any third-party software or services they utilize in their operations. This transparency extends to specifying the versions, configurations, and any customization made to these tools. By doing so, node operators demonstrate their commitment to openness and allow for a comprehensive understanding of their technological stack.
Additionally, node operators should maintain up-to-date documentation on their tooling choices, and any planned changes or upgrades. This level of detail provides valuable insights for other operators.
Performance Metrics
Ethereum validators have a few well-defined duties, each of which can be successfully completed or failed. While the RAVER metric is useful, a more detailed breakdown is preferable:
- Block attestation rate, including inclusion delay
- Block proposal rate
- Sync committee participation
It’s also crucial to report certain aspects of the infrastructure:
- Execution/Consensus/Validator client composition
- Node location setup, if relevant.
Risk Management and Operational Excellence
Providing regular, detailed updates about engineering practices is crucial for building trust and demonstrating operational competence. These updates should encompass a wide range of critical aspects:
- Slashing protection strategies: Detailed explanations of implemented measures to prevent slashing events, including redundancy systems and monitoring tools.
- Downtime response plans: Documentation on procedures to minimize downtime caused by unexpected reasons.
- Maintenance and upgrade procedures: Step-by-step documentation of processes for routine maintenance and software upgrades, including downtime management and rollback protocols.
- Key management protocols: In-depth overview of secure key generation, storage, and rotation practices, emphasizing multi-layer security measures and access controls.
- Incident response plans: Outline of procedures for handling various potential issues, from minor performance hiccups to major security breaches.
- Continuous improvement initiatives: Regular reports on efforts to enhance operational efficiency, security, and overall performance based on industry best practices and lessons learned.
The purpose of this second part of the series is twofold: we want to openly discuss opportunities for smaller players in the NO space and also contribute to the overall health and decentralization of the Ethereum network. By providing pointers for growth and success to smaller operators, we hope to help create a more diverse and robust network of validators. This diversity is crucial in mitigating the risks associated with having a small number of large operators controlling a significant portion of the network’s stake.
Furthermore, as more entities enter the NO space and grow their capabilities, it naturally leads to a more competitive and innovative environment. This competition can drive improvements in operational efficiency, security practices, and overall network performance. It also provides LSPs with a wider pool of reliable operators to choose from, reducing their dependence on a select few large operators and thereby enhancing the network’s resilience against potential points of failure or centralization.
In the next part of this series, we’ll dive into a more technical aspect of node operation, and showcase one of our tools designed to automate validator management on the Lido CSM protocol.
About Firstset
We commit our intellectual, social and computational capital to help bootstrap the cryptoeconomic networks of tomorrow. We are a team of crypto-native node operators and builders with a mission to support emerging chains and other kinds of decentralized networks from day one.