The Ethereum (ETH-USD) network’s shift from proof-of-work to proof-of-stake has resulted in a much more energy-efficient blockchain network. However, the switch has considerably reduced the network’s decentralization, concentrating most Ethereum validation activities within a few large organizations offering staking services.
Staking involves locking up a minimum of 32 Ethereum into a node that validates a blockchain network’s activities. These nodes are randomly selected based on the “stake” to validate transactions, receiving a reward for their contribution. Yet, more than half of the network validation power is currently held by four crypto-related parties: Lido Finance, Coinbase (NASDAQ:COIN), Kraken, and Binance.
This reduction of decentralization and a high degree of concentration can potentially expose the Ethereum network to security risks because if one party gains enough power, it can interrupt the formation of new blocks in the blockchain. Therefore, encouraging more participation in the network staking and validation process can help improve overall decentralization and network security.
To counter the centralization of the network’s power, which can result in censorship or other problems, validation infrastructure provider ssv.network is encouraging Ethereum’s decentralization with its newly-unveiled ecosystem fund. Community-owned ssv.network works on the security layer of the Ethereum network, or layer-0, to prevent network downtime by distributing the validation nodes responsible for its secure operation.
The $50 million ecosystem fund is joined by multiple organizations, including 1kx, Chorus.One, DCG, Everstake, GSR, HashKey, HackVC, OKC, and SevenX, among others seeking to spur greater use of the open-source Distributed Validator Technology (DVT) across Ethereum-focused staking applications.
The fund is focused solely on the DVT space and will be allocating funds to projects aiming to improve Ethereum’s decentralization over the long term. This latest move follows other related efforts after ssv.network’s decentralized autonomous organization (DAO), responsible for the protocol’s governance, approved $3 million worth of grants for developers. As more validators follow ssv.network’s lead and employ DVT, the network’s participants will be more capable of responding to the need for greater numbers of validators to secure the network.
Commenting on the fund’s launch, ssv.network’s Core Development Lead Alon Muroch noted, ”Distributing Ethereum’s security layer has never been more important. The protocol is currently secured by a small group of companies that, when put together, control the entire Blockchain. DVT’s aim is to distribute Ethereum’s security by offering quick and easy access to an open-source, public good that will completely change the way staking is operated today.
“There are already more than 20 companies building on top of ssv.network’s DVT protocol, and that list is expected to grow significantly with the Eco Fund’s launch.”
Decentralization in Focus as Shanghai Upgrade Approaches
The efforts by ssv.network to promote more widespread DVT are arriving just as Ethereum approaches the Shanghai upgrade, enabling network validators to unstake their Ethereum currently locked in validation nodes. Staked Ethereum does earn validation rewards in the form of more Ethereum, but until the upgrade is formally implemented, validators must maintain their stakes in validation nodes, which currently number nearly 16 million locked Ethereum.
Although there are many scenarios being posited about how this change could impact Ethereum’s price, the inclusion of more DVT-based applications is designed to ensure greater distribution of staking power and prevent the network concentration that currently prevails.
DVT is also designed to be more inclusive for solo stakers, institutions, staking pools, and other organizations to participate in network validation and security.
“We believe that it is a pivotal moment in ETH staking. We expect staked assets to increase as staking yields are considered the benchmark return for ETH owners. A near-term tailwind is Ethereum’s Shanghai Upgrade, which is due to be released in the first half of this year and will enable liquidity for those contributing to the network’s core infrastructure,” explained DCG Vice President and Head of Growth Samantha Bohbot.
“Few teams are as well-positioned as SSV to convene the diverse and cutting-edge products and applications that are using and developing staking technology. We are excited to support those projects as a founding member of this ecosystem initiative.”
As the Shanghai upgrade approaches, the use of ssv.network’s own SSV DVT protocol and ecosystem fund support for other initiatives adopting this open-source infrastructure can help Ethereum strengthen its security and enhance decentralization, preventing downtime or centralization that could negatively impact network operations.