Sirwin
Sirwin

Is Ethereum (ETH) UNSAFE?

By bmvtyea | Bernie-flow | 7 Jul 2023


 

On June 29, on the Bankless podcast, the so-called “prince of cryptos”, Vitalik Buterin, declared that he does not allocate all his ETH in staking, only a “small portion” of his capital helps secure the Ethereum network.


The reason for this, according to Vitalik, are the risks that currently exist in carrying out staking.


And he is not alone in this opinion: other developers and researchers at the Ethereum Foundation have also made clear the risks of staking. One of the researchers is Justin Drake, author of EIP-1559 and responsible for the economic question behind ETH.


Justin made it clear that he doesn't stake all his ETH, precisely because he understands "how the machine works".

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This provocation ended up being misunderstood by part of the crypto community, because it implied that developers do not have a skin in the game – that is, they do not put their money where their mouths are.


However, in my opinion, this was just a sensible position by the developers, to make it clear that staking activity has risk, yes!

This is even one of the most striking features of the activity: you are putting your capital locked up in exchange for an income based on the risk of providing security for a blockchain.


The problem with the controversy is that the market seems to be having the wrong view about staking activity, and they are dismissing the risk inherent in carrying out the procedure – which, even if it is a low risk considering the solidity of Ethereum, still exists.


The so-called “passive income” in crypto is not all that passive, as part of the market seems to believe.


The income provided by the networks to those who take the risk of doing validation is not willingly given without the burden. We need to consider what we are leaving on the table – after all, there is no such thing as a free lunch.

 

When we lock capital into Proof-of-Stake networks, we need to consider that money can be lost with:

 

  • Slashing, that is, if the validator makes mistakes, part of the money can be lost;
  • Technology flaws, after all, blockchain is not yet a consolidated and mature type of technology – failures would not be such a big surprise;
  • And yet, considering the type of delegation done in Ethereum (through third-party protocols, not natively on the network), flaws in smart contracts.

 

On that last point, it is a big problem of Staking on Ethereum: the network is not natively a Delegated Proof-of-Stake (DPoS) – that is, a Proof of Validation network that allows the delegation of staking tokens to third parties validate – as happens in almost all networks today.


The network was built to be a "pure" PoS blockchain to encourage individual Staking by users. However, network users did not take this issue very well.


Therefore, there are non-native ways of staking Ethereum without necessarily validating the blocks yourself.

One of the protocols that offer this service is Lido Finance (LDO).


Unfortunately, because delegation is not a native feature, this adds a layer of risk for us, mere investors who want a few more percentages in our portfolio through the income that staking offers.


That's what Vitalik was talking about when he talked about the risks of staking on Ethereum and why he didn't lock all the ETH he has in the network validation. His concerns revolve around the infrastructure of third-party platforms that do ETH staking.

 

Soon, Vitalik suggested some alternatives to provide more security for staking on Ethereum, such as a multi-signature system. This system requires a specific number of signatures to approve a transaction, reducing the risk of unauthorized access to funds. However, this mechanism has a good and a bad side. While it would increase security, it would add more complexity to staking ETH. Therefore, he strongly emphasized the importance of improving security while making staking more accessible to encourage broad user participation.


About Lido in particular, it is one of the groups that does this in a more professional way, precisely because it has a smart contract responsible for managing all withdrawals (and which was audited by about 6 specialized companies), and in addition it uses the validation of the 30 companies (which are the Node Operators).


Even so, this does not exclude the risks that the contract that manages the withdrawals suffers a problem – such as, for example, if the withdrawal keys are compromised – much less excludes the risk of slashing that any of these companies may suffer.

 

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bmvtyea
bmvtyea

Young Brazilian newbie in Crypto


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Bernie-flow

Trying to inspire those who doesn't have some financial conditions, such as myself, to growth a nice portfolio.

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