Did you know that one of the largest exchanges already provides free staking?

Here’s three secrets you should know about Ethereum 2.0 staking and what to do about them.

You’ll want to know about free staking, but more important is doing it with Secret Shared Validators to help maintain network security.

But first, by reporting some facts it can be perceived that there’s businesses the author biases.  In truth, there’s little bias and don’t shoot the messenger :)  The author’s bias is for the ecosystem which thrives with all the entities in it, and thrives even better when you, the customer, does well.

Secret #3: You should demand free staking

The market for Ethereum 2.0 staking services is building up.  You need to know the possibilities.  You can prod the market.  If you plan on staking, you should express what you’d like.  Collectively, at this early stage, stakers can meaningfully lead and shape the market.

As reported last month:

“Coinbase charges the highest fee –25% – for XTZ staking, while Kraken charges 7.25% and Binance currently charges no fee.”

You may have thought that free staking is too cheap.  Don’t, because it’s already possible and sustainable by some.  Binance’s business model includes free staking, a bit like how Internet business models give you a free email account. 

What’s unclear is when Binance will offer staking on the Ethereum 2.0 Beacon Chain.  If you’re a Binance customer, it’s worth prodding them for Ethereum staking with Secret Shared Validators.  Otherwise it could be months where you may have to suffer 25% staking fees.

Free staking is good for you but will have its critics.  This post will not debate much because the two remaining secrets are even more important.

Some may think free staking to be unlikely, but if Binance offers free Ethereum staking, one more exchange (especially Coinbase) could make free staking inevitable.  Two companies can tip the market towards free staking.

Free staking makes it harder for startups that want to compete in the retail market.  But startups that can tackle markets such as institutional staking, or innovating in other areas, are likely to be healthier for the ecosystem. I’d like to repeat that fees for institutional staking would be highly desirable, so that revenues from it can help fund free staking for the retail market sustainably.

For retail stakers, low fees are very important like the triumph of stock market index funds over actively managed funds.  Further, as the number of validators increases, the Annual Percentage Return for staking decreases.  Staking returns don’t more penalty of staking fees.

Free staking is good for you.  You should demand free staking from the providers charging a fee.  Now, is there a catch to free staking?  Only if secret #1 doesn’t happen.  #1 is Secret Shared Validators and it also needs your voice.  Let’s discuss the risk to free staking if Secret Shared Validators don’t happen.

Secret #2: Staking companies with the most validators can attack the network

Coinbase explains: “You retain full ownership of your crypto, but you’re delegating your staking power to Coinbase.” It hints at the power that staking services amass, but does not educate the risks of that power.

Ownership and custody is relatively simple in Ethereum 2.0 staking, because there are two staking keys.  One is a validator “hot” key, and one is a withdrawal “cold” key.  Basically, whoever has the withdrawal key, owns the funds.  You can give the validator key to a staking company, and keep the withdrawal key to yourself: a company cannot steal your stake (though they can lose the stake).

By giving your validator key to a company, you give them full power to control your validator.  This is the delegated staking power quoted above.  When many people give their validator keys to a company, that company can control enough validators to be a threat to the Ethereum 2.0 network.  The company could knowingly or unknowingly command validators to attack the network.

Free staking increases risk of an attack on the network, especially if there’s only one free staking service and it captures most of the stakers.  Existing Proof of Stake blockchains have no protocol defence against this.

You need to know this dark side of free staking services, but also the good news that the Ethereum 2.0 protocol has been designed with fundamentals to eliminate risk from a single entity.

The #1 secret is little known in the market, but should also be among the priorities in the Ethereum 2020 roadmap to keep the Ethereum 2.0 network more secure.

Secret #1: You should demand Secret Shared Validators

A Secret Shared Validator is like multisig for a validator.  Instead of a validator being controlled by a single signature, multiple signatures would be required to command a validator.  This means that you don’t have to delegate your staking power to a single company.  You should demand a standard for Secret Shared Validators, and demand that staking companies comply with the standard.

Unlike current Proof of Stake blockchains, Ethereum 2.0 is designed to enable Secret Shared Validators.  The Beacon Chain uses BLS signatures.  Since BLS signatures are additive, Shamir’s Secret Sharing can be used to split the validator private key into multiple shares.  From the individual  share signatures, the full BLS signature can be computed.  You can configure how many shares to split your validator private key, and how many share signatures are needed for the full BLS signature.

For example, if Prysmatic Labs and Sigma Prime (or others) have free staking for (retail) members of the community, then you could split your validator private key into three shares and give each a share.  You give the third share to Binance.  The setup could be 2-of-3, so that a single signature is unable to command your validator.  Two of the companies would have to sign the same message to command your validator. A company would not have unilateral power to command all the validators of their customer base.

Some may tell you that you should run your own validators.  That’s fine if you’re comfortable and enjoy the work.  But it’s not the mainstream solution yet.

Secret Shared Validators are critical. There should be easy tools for you to split your validator private key into shares that you can provide to staking companies.  There needs to be a standard for how to operate Secret Shared Validators so that staking operations of different companies can be combined.

Even if you run your own validators, you can still benefit from Secret Shared Validators.  They allow you to spread validators across several machines and even different data centers.  This increases security and avoids single points of failure.

There’s a chance that Binance provides free staking but doesn’t allow Secret Shared Validators.  Let’s be clear, you should demand that a company supports Secret Shared Validators before signing up for their free staking.  If Binance offers 0% fees, you want Secret Shared Validators.  If Binance offers 0.5% fees, you still want Secret Shared Validators: paying fees is not a substitute.

Priority of Secret Shared Validators

Prioritizing Secret Shared Validators depends on one’s views about the likelihood of free staking and the threat of a single company obtaining many validators.  There’s no alarm for Secret Shared Validators yet.  Currently, Ethereum 2.0 client teams are correctly focused on hardening and productionizing their clients.  More will soon be written about Secret Shared Validators, to kickstart the specification and implementation of Secret Shared Validator clients, as well as a standard for Secret Shared Validators that staking companies should adopt.

There is related work around Proof of Custody for eth2 Phase 1, and trustless staking pools. Such work (and maintaining focus on it) is important.  However, we should not be confused that it covers what’s needed for Secret Shared Validators.  Such work is not explicitly leading to Secret Shared Validator clients that can be used in production.  Nor does the work lead to a standard for Secret Shared Validators so that staking operations of different companies can be combined.

A dream or will it play out?

Is it a good dream to have Binance and a couple of others provide free staking with Secret Shared Validators?  Will Coinbase join?  We’ll need to drive towards ensuring:

  1. a specification for a Secret Shared Validator client
  2. there’s easy-to-use tools (and UIs) that allow you to split your validator private key into multiple shares
  3. at least one implementation of a Secret Shared Validator client
  4. a standard for how to operate Secret Shared Validators (so that staking operations of different companies can be combined)
  5. for retail customers, multiple companies offer free staking with Secret Shared Validators
  6. you sign up with two or more such companies and enjoy free staking more securely

The first four items are needed so that Secret Shared Validators can be tested on testnets and released on Mainnet.  For the fifth item, you can prod exchanges and prod Binance to use Secret Shared Validators and enter the Ethereum staking market sooner.

Secrets for you to spread

You should know that free staking is viable (even maybe inevitable).  But, there’s a risk to the Ethereum 2.0 network if there’s only one free staking company that everyone joins.  Secret Shared Validators would prevent a company from unilateral control of their customers’ validators.  We need a spec and implementation of a Secret Shared Validator client and contact @dankrad on Twitter or email dankrad@ethereum.org if you’d like to work on this.

Most important, you should demand a standard for operating Secret Shared Validators that staking companies should comply with.  Let’s hope that you can enjoy free staking on Ethereum with Secret Shared Validators to maintain network security.  Let’s all make it happen!

Thank you to Dankrad Feist for reviewing a draft and feedback, including Secret Shared Validator terminology (I capitalized for readability).  As always, reviewers don’t imply agreement with my opinions.