Ethereum Pectra Upgrade: Key EIPs and Implications for Validators– Part II
EIP-7251 as a solution to reduce Ethereum’s validator set
Participation as a validator in the Beacon Chain is fundamental to ensure the security and decentralization of the Ethereum network.
The recent EIP-7251 upgrade proposal to implement with Pectra Upgrade seeks to radically change the way staking protocols and validators, in general, interact with the protocol, offering new opportunities to maximize participation and optimize rewards.
In this post, we explore how EIP-7251 directly impacts the validator experience on Ethereum, a continuation of a series of educational articles on Pectra Upgrade and its impact on the staking industry, of which SafeStake is a crucial component.
If you are not yet familiar with Pectra Upgrade, we invite you to read our previous post:
Ethereum Pectra Upgrade: Key EIPs and Implications for Validators
Key points
- EIP-7251 increases the maximum effective balance from 32 ETH to 2048 ETH but keeps the minimum activation deposit at 32 ETH.
- A new “compounding withdrawal credential” is introduced to allow validators to reinvest their rewards automatically.
- A consolidation operation allows validators to combine their balances without exiting and re-entering the protocol.
- Validator activation and withdrawal processes are modified to limit changes in total network weight between epochs.
- Slippage-slashing schemes are adjusted to accommodate the presence of validators with higher and more effective balances.
Understanding the Effective Balance
The proposed Ethereum EIP-7251 enhancement aims to increase the maximum effective balance (MAX_EFFECTIVE_BALANCE) of validators in Ethereum’s Beacon Chain from 32 ETH to 2048 ETH.
The concept of effective balance is crucial for determining the influence of a validator on the network consensus and is fundamental to the economic security of the protocol.
In Ethereum, more specifically in Beacon Chain, a validator has two balances: an actual balance and an effective balance. The -actual- balance is the sum of the validator’s initial deposit, rewards earned, minus penalties and any made withdrawals.
On the other hand, the validator’s effective balance is derived from the actual balance and represents the maximum amount that a validator has at risk from a protocol perspective.
The concept of effective balance relates to economic security in Proof-of-Stake (PoS) protocols. Economic security refers to the ability of a protocol to impose a high cost on actions that could give the impression of an attack on the system.
In this sense, a validator with more at stake has less incentive to act dishonestly, as the penalties for dishonest behavior increase proportionally to the guarantee promised by the validator.
Furthermore, in Ethereum, the effective balance of a validator determines its weight or influence in the protocol consensus. For example, a Beacon Chain block is “final” if the total participation of validators who voted for a block represents a supermajority (66% or more) of the total participation of all active validators.
Therefore, the effective balance of a validator is crucial for its participation in the consensus and its contribution to the security and decentralization of the network, based on the premise that a validator with “more at stake” has less incentive to act dishonestly.
Beacon Chain considers each validator to have at most 32 ETH (the maximum effective balance) at stake in the protocol. MAX_EFFECTIVE_BALANCE was initially set to 32 ETH in Ethereum’s Beacon Chain as part of the original network fragmentation roadmap.
The goal of setting this value was to prevent an attacker from finishing an invalid block by controlling a large part of a committee’s total participation.
Any balance above this limit is not considered “at stake” and is not subject to either rewards or slashing, as Beacon Chain performs a “sweep” on each block and automatically withdraws amounts above 32 ETH to the execution layer address specified in the validator’s withdrawal credentials, as provided in EIP-7002.
Recall that EIP-7002 allows stakers in DVT protocols such as SafeStake to REDUCE assumptions of trust in delegated staking by allowing withdrawal credentials to retain control of the staked ETH, effectively decoupling a validator’s signing key from the withdrawal key.
Validator Consolidation
One of the features of EIP-7251 is to introduce a validator consolidation mechanism without diminishing the existing security mechanisms or increasing the operational overhead and risk for single stakers and staking services. The proposal increases the maximum effective balance for validators without changing the minimum amount that a validator must stake to join the network.
In simpler words, it introduces the MIN_ACTIVATION_BALANCE constant set to 32 ETH, which represents the minimum effective balance required for a validator to activate and modifies the is_eligible_for_activation_queue constant to check MIN_ACTIVATION_BALANCE instead of MAX_EFFECTIVE_BALANCE.
The previous is a powerful premise as it allows solo stakers to continue running validators as small as 32 ETH, incentivising network decentralization and seeking to address the artificial decentralization we see in Beacon Chain with large pool staking such as Lido, which controls a large number of validators in less than a hundred node operators.
Remember that multiple validators can run on a single machine, thus allowing a node operator to manage several validators, even though the network considers each validator an entity. In practice, several validators can share the same addresses and withdrawal credentials.
In short, a single entity controlling multiple validators to maximize profits with significant concerns about the network’s ability to terminate blocks.
In addition, artificial decentralization generates problems such as excessive expenditure of computational resources in processing consensus messages from the same entity, increasing the p2p2 load and raising costs for solo stakers that must invest in outstanding hardware resources to keep up with the chain.
The previous means that fewer and fewer individual stakers wish to join the network as validators, leading to risks of centralization in large institutional players.
These problems are some of the reasons why consolidating validators in Beacon Chain to allow participants to combine their balances efficiently and without the need to exit and re-enter the protocol, simplifies the management of multiple validators, optimizes the staking process in the network while efficiently handling many of the problems outlined above.
In general terms, the consolidation process proposed in EIP-7251 would work as follows (according to the official specifications):
1. Start of Consolidation:
- A validator wishing to consolidate its balance with another validator signs a “Consolidation” object indicating its intention to combine its balances.
- This Consolidation object is transmitted over the peer-to-peer network and included in a Beacon block to initiate consolidation.
2. Consolidation Process:
- During the processing of the block containing the consolidation, a function called “initiate_validator_exit” is activated which sets the exit and withdrawal time of the source validator.
- A “pending consolidation” is inserted in the Beacon status for the source and target validators.
3. Transfer of Funds:
- While the source validator is in the output queue, it continues to perform its functions in the Beacon Chain until it reaches the withdrawal epoch.
- Instead of sending the funds from the source validator to the withdrawal address, they are transferred to the balance of the destination validator, thus increasing the latter’s effective balance.
4. Completion of Consolidation:
- The transfer of funds takes place during the processing of the epoch, specifically in the “pending consolidation” process.
- It is verified that both the source and the target validators have the same withdrawal address, confirming that both parties approve the consolidation.
- Once the consolidation is complete, the source validator’s balance gets transferred to the target validator, and the target validator assumes responsibility for the consolidated balance.
Benefits of Increasing the MAX_EFFECTIVE_BALANCE
The increase of MAX_EFFECTIVE_BALANCE from 32 ETH to 2048 ETH in EIP-7251 opens up new possibilities for validators, benefiting not only institutional or large validators but also individual validators, allowing them to consolidate their balances and optimize their rewards.
The observation that subcommittees can operate with honest minority assumptions ( 1-of-N) implies that MAX_EFFECTIVE_BALANCE is no longer required to set a constant of 32 ETH.
Consequently, some of the direct benefits of increasing the MAX_EFFECTIVE_BALANCE among the various players that make life in the ETH staking industry are:
For Individual Validators:
1. Maximizing Rewards: By increasing the MAX_EFFECTIVE_BALANCE, individual validators can consolidate their balances and optimize their rewards, allowing them to escalate their earnings efficiently.
2. Flexibility in Participation: Gives the ability to have a higher effective balance while giving individual validators the flexibility to tailor their staking strategy and maximize their influence on network consensus.
3. Reduced Operational Complexity: Balance consolidation simplifies the management of multiple validators, reducing the operational burden and improving the efficiency of staking.
For Staking Pools and Validation Services:
1. Operations Optimisation: By consolidating balances from multiple validators, staking pools can optimize their operations, reducing the complexity and costs of managing several validators.
2. Profit Maximization: Balance consolidation allows staking pools to activate new validators more efficiently, thus increasing their profits and offering better returns to their stakers.
3. Reduced Network Load: By reducing the number of validators in the network through balance consolidation, the load on the consensus layer gets reduced, improving overall network efficiency and stability.
For Network Security and Decentralisation:
1. Improved Economic Security: An increase in the MAX_EFFECTIVE_BALANCE strengthens the economic security of the protocol by limiting the risk of dishonest behavior and ensuring that validators have a more significant amount at stake.
2. Promoting Decentralization: It encourages a more equitable distribution of the staking process, promoting decentralization and diversity of players in the Ethereum ecosystem by allowing validators to consolidate their balances.
Compound withdrawal credential
The proposed EIP-7251 enhancement introduces a new composite withdrawal credential (0x02) to complement the existing BLS withdrawal credentials (0x0) and execution layer withdrawal credentials (0x01).
The new credential intention is that validators (stakers & staking services only) can combine their rewards and thus activate a new validator without needing to exit the protocol.
In addition, they would not be subject to the Beacon Chain ‘sweep’ and could continue generating rewards without interrupting the workflow because they could accumulate a higher effective balance up to the proposed limit of 2048 ETH.
It is worth mentioning that the migration to this withdrawal credential is voluntary, so it will be up to each entity (or individual) whether they wish to continue to stake with 32 ETH or increase MAX_EFFECTIVE_BALANCE with the rewards earned to stake higher amounts.
However, it is worth noting that a validator with this new credential can set a custom value below 2048 ETH for MAX_EFFECTIVE_BALANCE to be subject to partial withdrawals according to its business model.
Other considerations to take into account
It is crucial to mention that EIP-7251 is quite comprehensive and consider taking the time to read its specifications in detail about the proposed changes beyond the increase of MAX_EFFECTIVE_BALANCE.
The validator activation and withdrawal processes modification to limit the total network weights between epochs and adjusting the slippage-slashing schemes to accommodate the presence of validators with higher successful balances are some of the aspects to consider in this proposed improvement.
In summary, EIP-7251 represents a significant step towards optimizing validator participation in Ethereum. By increasing the MAX_EFFECTIVE_BALANCE and facilitating balance consolidation, this proposal offers new opportunities to maximize rewards and strengthen network security.
Get ready to make the most of your participation as a validator on Ethereum with EIP-7251 and SafeStake!
About SafeStake
SafeStake is a pioneering technology company focused on revolutionizing Ethereum staking. With its cutting-edge, decentralized Distributed Validator Technology (DVT), SafeStake provides an ultra-secure, fault-tolerant environment for Ethereum validators, maximizing staking rewards and minimizing penalties. SafeStake is committed to driving the growth, innovation, and decentralization of the Ethereum network while ensuring the security and prosperity of its participants.
