Getting to Know Third Party Validators
You’ve already attempted to run your own validator on the Medalla testnet. You’ve tried to follow instructions provided by the Ethereum Foundation and community members (I, II, III, IV) but couldn’t manage to spin up your nodes. You have learned a few things about the process, but are concerned that you won’t be able to stake your ETH.
I understand that running validators, keeping them online all day, and actively monitoring their performance is truly not for everyone. Regardless, people should have the opportunity to participate in Eth 2.0’s security and earn rewards. After all, this is one of the advantages of moving from Proof of Work to Proof of Stake (PoS).
You will need to start evaluating what your third party validator options are. This involves any service that will stake your ETH on the Beacon Chain without having you run your own validator nodes. Alas, not all third party validators are built identically. They have unique pros and cons, and today I’ll go over a few of these.
Exchanges and custodians
Let’s start off with the most obvious ones. Exchanges and custodians are entities that have licenses and key management experience that let them store your crypto, ideally being fully compliant with local regulations. You may have used the exchanges Binance or Coinbase at least once in your crypto-life, and you may see that they have both started offering rewards on PoS coins. Similarly, custodians like Coinbase Custody and BitGo have been accelerating support for new PoS coins along with staking options for these assets due to increasing demand from their clients.
Exchanges and custodians will be without a doubt the easiest platforms to use to stake your ETH. Since they hold all the keys and manage your funds for you, there will be very minimal effort required from your end. The question will simply be about how quickly these entities roll out support for Ethereum 2.0 staking and what sort of fees they will charge.
Biggest advantage: Convenience
Biggest disadvantage: Not your keys, not your coins
Staking pools
Staking pools were conceived once the initial specs of Ethereum’s transition to Proof of Stake involved a minimum bond threshold. Currently, to become a validator on the Beacon Chain, you need exactly 32 ETH. If you don’t have this amount, there is no way to become a validator on your own.
32 ETH is not a negligible amount! This is where staking pools come into play, helping people “pool” their ETH together to fulfill the minimum 32 ETH amount and matching these “pooled” ETH with people who can run validator nodes. While most staking pools will strive to decentralize the pooling and matching process, there may be varying degrees of trust that will need to be put into this system.
The pooling and matching designs will be conducted through smart contracts deployed on the Proof of Work Ethereum chain. While it is impossible to create a fully trustless staking pool in Phase 0 of Ethereum 2.0, staking pools should have some plans on how to decentralize withdrawal keys.¹
Biggest advantage: Helps users stake with less than 32 ETH
Biggest disadvantage: Smart contract risk
Validator-as-a-service
Validator-as-a-service teams have been around for a while. Many of these teams have expertise running validators on different PoS networks. They have dedicated infrastructure and personnel to solely run validators for other people to stake their coins with. The amount of experience that these teams have accrued cannot be discounted.
These teams will offer validators to people who already own 32 ETH. They will not take custody of your funds and will let you keep your withdrawal keys. Interacting with these services will feel almost like using a traditional cloud computing service.
Biggest advantage: Experienced
Biggest disadvantage: Higher fees than other services, higher cost to entry
Some key factors to consider when choosing your third party validator
1. Make sure you can rely on the third party validator.
One fact to keep in mind is that withdrawals will not be available during Phase 0 of Ethereum 2.0. This means that once you sign up for a validator service in Phase 0, you are stuck with that service until at least Phase 1 when withdrawals will be enabled. You need to make sure that the validator service is experienced enough to be running validators for you for the next 1–2 years without any major incident.
Another less obvious part of your due diligence should be to determine whether the team can survive the next 1–2 years. Running a sustainable project in the blockchain ecosystem is a challenging task. Unlike what many people may believe, the validator space looks nothing like the early days of mining. The market is much more cutthroat and will price out less competitive teams.
2. Track how keys will be managed.
There are two keys on Eth 2.0. The signing key is in charge of conducting validator responsibilities while the withdrawal key is the only way to transfer funds out of a validator. It is most likely that signing keys will be in the possession of third party validators, but the withdrawal keys will be managed in widely varying ways.
Make sure you understand where the withdrawal keys will be located. If you need to hold onto them, make sure you back up the mnemonics and store them in a safe location. If they will be held by the validator team, make sure they have the proper custodian licenses and expertise in storing keys. If the withdrawal keys will be stored by a custodian, make sure the custodian has a good reputation and track record. Additionally, look into who the major clients of that custodian are.
3. Determine what sort of fees will be charged.
Third party validators will charge fees in one of two formats: 1) a percentage of the staking rewards received or 2) a fee pegged to fiat or crypto. Try modeling out on your own on your expectations of future ETH price and staking reward rate to determine which fee would be more advantageous for you.
Also, you will be locked in with a validator for the next 1–2 years until withdrawals are fully enabled. This means that you will need to pay that validator service for the entirety of this period. Make sure you understand the fees that will be charged by the validator and whether any fee changes could happen. Try to lock in fees so that you aren’t ambushed by a sudden change in fees.
4. Observe all the features that will be provided.
Some third party validators may just run a simple validator operation and end there. However, there will be many others that will provide some additional features that can make your life easier as an ETH staker. For example, you will need detailed reporting of how much ETH you accrue by staking for tax reporting. It’ll be a pain to pull this independently through on-chain data and some validators will readily provide this information in a nice spreadsheet. Also, some validators will provide nice dashboard interfaces for you to observe your staking performance over time.
Some name drops
I am providing a list of staking pools and validator-as-a-service providers that are going to support Ethereum 2.0 staking. I list these in alphabetical order with links to their main websites. This list may not be inclusive of all players, and I will keep updating it with any players I’ve missed. Additionally, being on this list does not mean I endorse any of these teams. Please do your own research on them and ask plenty of questions!
[1] Vitalik Buterin has alluded to the possibility of directing withdrawal keys to an address on Proof of Work Ethereum. This would enable designs that fully decentralizes the withdrawal keys. However, it is unlikely this feature will be added at the beginning of Phase 0.
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