Overview of proof of stake in Ethereum

Proof of Stake (PoS) is the consensus mechanism that underlies Ethereum. The term "consensus" refers to the general agreement among network participants, and a consensus mechanism ensures all nodes in the network agree on the state of the blockchain

PoS can be described as shareholder voting. A simplified Ethereum’s proof-of-stake algorithm is like following. Anyone can become a validator by locking up 32 ETH as collateral. Once staked, validators can participate in creating and agreeing on new blocks, although they must wait to be activated. Once activated, validators receive new blocks and send votes (called attestations) in favor of those blocks across the network. Every 12 seconds (called a slot), one validator is randomly selected to propose a new block, which is then broadcast to other nodes. Simultaneously, a committee of validators is randomly chosen in each slot to vote on the validity of the proposed block. While only a subset of active validators attests in each slot, every active validator participates in every epoch (which consists of 32 slots).

A transaction is considered "finalized" if it is part of a block that cannot be changed without burning a significant amount of ETH (at least 51% of the staked ETH). For a transaction to reach a "finalized" state, at least two-thirds of the total staked ETH must vote in its favor. In Ethereum, dishonest behavior by validators is addressed primarily through two mechanisms: proposing multiple blocks in a single slot and submitting contradictory attestations. Validators earn ETH for honest participation in block validation and proposals; however, their staked amount can be forfeited for dishonest behavior.

Lido

Overview

To participate in the staking process of Ethereum, one must hold at least 32 ETH, which poses a barrier for many users. However, with liquid staking protocols like Lido, more users can stake their ETH without meeting the 32 ETH minimum requirement.

Lido pools funds from users to meet the 32 ETH threshold and maintains a set of node operators responsible for running validators. These operators are selected through Lido's community governance and are known for their strong reputations and track records. The annual percentage rate (APR) for Lido staking is calculated as follows: Protocol APR × (1 - Protocol Fee). Here, Protocol APR refers to the overall rewards from the Consensus Layer and Execution Layer received by Lido validators relative to the total pooled ETH, while the Protocol Fee is a 10% charge split between node operators and the DAO treasury. Additionally, users who stake with Lido receive stETH, which corresponds to the amount of ETH staked, and this stETH is burned when users choose to unstake.

In summary, Lido is a liquid staking protocol that enables broader participation in Ethereum’s PoS mechanism, even for those who cannot meet the 32 ETH requirement. It also contributes to the decentralization of Ethereum by allowing more individuals to participate in the consensus layer. Furthermore, Lido seeks to expand its ecosystem by supporting additional chains and partnering with various DeFi protocols. This allows for greater utility of stETH, such as lending on AAVE or restaking on EigenLayer.

Risks

However, like any system, Lido is not without risks. The three main concerns include smart contract security, slashing, and stETH price fluctuations.

Smart contract security risk: Lido is non-custodial and relies on smart contracts for its functionality. Inherently, Lido contains the risk of smart contract vulnerability or bug. To reduce the risk, Lido has open-sourced all its code, have all the core contracts audited and runs bug bounty program with lots of resources.

Slashing risk: As mentioned earlier regarding PoS, validators may have their staked ETH slashed for dishonest behavior. To minimize this risk, Lido carefully selects node operators with strong reputations and historical performance. Additionally, Lido maintains a diverse set of operators to safeguard against slashing incidents caused by dishonest operators.

stETH price risk: though users can withdraw same amount of ETH with stETH with Lido, the prices of stETH and ETH may not be the same on exchanges. Due to delays in withdrawing ETH with stETH on Lido, users may want to swap stETH to ETH directly and the price difference could lead to financial losses.

Restaking with EigenLayer

The PoS cryptoeconomics underpinning Ethereum ensures its security, decentralization, and sustainability. While Ethereum is an exceptional platform for secure, transparent, and permissionless operations, decentralized applications (dApps) and services that cannot be deployed on the Ethereum Virtual Machine (EVM) need to establish a new trust network to bridge the security gap between on-chain and off-chain activities.

EigenLayer is a protocol built on Ethereum that introduces restaking—a new mechanism for cryptoeconomic security. It enables Ethereum stakers to participate in EigenLayer's PoS mechanism by restaking their staked ETH or Liquid Staking Tokens (LST, such as stETH) to provide the additional security required by dApps and decentralized services, referred to as Actively Validated Services (AVSs). In essence, EigenLayer expands Ethereum's security to additional applications within the network.

EigenLayer comprises four key concepts: restaking, operators, delegation, and Actively Validated Services (AVSs).

  • restaking: since EigenLayer also utilizes PoS mechanism, it allows stakers to participate in EigenLayer ecosystem by restaking their Native ETH or LST.
  • Operators: : These are entities that run software for AVSs built on EigenLayer. Operators function similarly to Ethereum validators or Lido node operators. They register with EigenLayer and provide various AVS services. Stakers can delegate their staked ETH to operators without a minimum staking requirement.
  • Delegation: EigenLayer restakers may be interested in participating in EigenLayer, but don’t want to act as EigenLayer operators themselves( like users in Lido protocol maybe interested in participating in Ethereum’s PoS mechanism but don’t want to be node operators themselves). These restakers can delegate their ETH ( validators that have staked their ETH to Ethereum’s PoS can point their withdrawal credentials to the EigenLayer contracts) or LSTs to other entities who are running EigenLayer operators. There would be a ratio of fees splited to operators.
  • AVSs: These are services built on the EigenLayer that leverage Ethereum’s shared security. Operators perform validation tasks for AVSs, thereby contributing to the security and integrity of the network and AVSs deliver srvices to AVS consumers.

Conclusion

In summary, this blog focuses on the PoS cryptoeconomics within the Ethereum ecosystem. It provides a simplified workflow of the PoS mechanism and explains how more individuals can participate in Ethereum's PoS via the Lido protocol, even without owning 32 ETH or the desire to run validators. Additionally, it highlights the three main risks associated with the Lido protocol: smart contract vulnerability, slashing, and stETH price risk. Finally, the blog offers a brief overview of the EigenLayer protocol, which also employs PoS to enable ETH stakers to restake their ETH ( in the approach of staking beacon chain withdrawal credentials or LST) to leverage Ethereum's security and enhance safety for other applications.

Reference

Proof-of-stake (PoS) by corwintines

EigenLayer: The Restaking Collective by EigenLayer Team