The Diva testnet is about to launch, let's get to know the financing star of the LSD track

Author: Jack 0x137

Source: BlockBeats

The Ethereum Shanghai upgrade is set to arrive in March this year, allowing stakers to withdraw their previously staked ETH. Recently, the anticipation of the upgrade has also brought significant attention to the LSD (Liquid Staking Derivatives) sector, with leading projects like Lido and RocketPool experiencing substantial increases, while the new player Diva is set to launch its testnet soon.

On January 17, the Diva team announced the completion of a $3.5 million seed round financing, with participation from top players such as A&T Capital, Gnosis, Bankless, and OKX, making Diva a "financing star" in the LSD sector. What highlights do latecomers in this sector have? What opportunities can they bring us?

Issues and Opportunities in the LSD Sector

As Ethereum transitions to a PoS (Proof of Stake) model, ETH has become the decisive asset ensuring the network's security. Although PoS brings multiple advantages, the minimum staking requirement of 32 ETH creates a high economic cost, preventing many Ethereum users from playing a leading role in securing the Ethereum network. This situation has further led to an increasingly centralized pattern of Ethereum staking.

Currently, Ethereum staking operates in a highly centralized manner, with large CEXs like Coinbase and Binance controlling the validator keys, fully managing block production, transaction verification, and MEV (Miner Extractable Value) selection. As the funds in these staking pools grow, individual nodes become increasingly powerful, eroding Ethereum's decentralized value, while the entire Ethereum network is protected by only about 5,000 beacon chain nodes, most of which are concentrated in jurisdictions with high regulatory risks.

Clearly, the idea of having most Ethereum users run their own "32 ETH validator nodes" is unrealistic. Not only is the cost prohibitive, but the required technical skills also have a high barrier to entry. In this context, Liquid Staking protocols were born.

By aggregating users' ETH and staking it collectively, Liquid Staking protocols eliminate the 32 ETH threshold, while users can also receive Liquid Staking Derivative (LSD) tokens, allowing them to earn staking rewards while maintaining their original liquidity. Of course, for crypto players focused on the Ethereum ecosystem, these are already well-known topics.

Currently, Lido is the absolute leader in the LSD sector, completely handing over control of the validator node keys to a small number (currently about 30) of whitelisted node operators. The second player in the LSD sector, RocketPool, retains the validator keys with various node operators and incentivizes honest behavior through the issuance of "16 ETH bonds," making node operation more decentralized.

However, Lido's excessive monopoly in the LSD sector poses significant risks to Ethereum's decentralization and security. Currently, the total value of ETH staked through Lido has reached $6 billion, accounting for 30% of the total staked amount, far exceeding RocketPool. Clearly, the market needs more decentralized staking solutions, providing potential space for new protocols like Diva.

Diva adopts Distributed Validator Technology (DVT), which has recently come into the spotlight for market participants. DVT is a high-quality solution to the current centralization of Ethereum staking operators, and many view it as the new standard for Ethereum staking. Since Lido has not yet deployed this technology, it provides an excellent opportunity for new players in the LSD sector to catch up (Note from BlockBeats: for more on DVT, please read “After the Ethereum Merge, DVT Distributed Validation Will Become a Key Technology”).

Although the DVT solution has been public for some time, many staking protocols have not achieved mature integration of it. As middleware for liquid staking, DVT does not have an economic mechanism to connect staking users and node operators in a trustless and permissionless manner. Diva, on the other hand, provides an economic model that combines the interests of both parties, reward distribution, and penalties, along with operator collateral, making it more mature compared to other protocols.

At the same time, the upcoming Ethereum Shanghai upgrade in March will further heat up the LSD sector, presenting a significant deployment opportunity for latecomers. In January, A&T wrote in “A&T Family: Why We Invested in Diva” that "assuming ETH reaches a token price of $10K in the next bull market, with 50% of ETH staked, the annual revenue of the ETH Staking market will exceed $35B. For service platforms like Diva, the market's annual revenue scale could reach $3.5B, providing immense potential." It is evident that new projects like Diva in the LSD space warrant continuous attention.

Diva's Technical Composition

"Diva" signifies distributed validation, aiming to establish the most resilient liquid staking protocol, providing more flexible incentive mechanisms for Ethereum stakers and node operators in a more decentralized manner. The team believes that creating a distributed peer-to-peer network to collaboratively operate validator nodes is the best alternative to single nodes (minimum staking of 32 ETH).

Diva's technical composition includes a decentralized node network, an immutable smart contract, and an oracle (expected to be deprecated after EIP-4788). Like most Ethereum liquid staking protocols, Diva has no minimum staking requirement for stakers. Users will receive Diva's liquid staking token diveETH in a 1:1 ratio when staking ETH, which can be used in other DeFi applications for reception, yield farming, etc., to earn additional returns.

Diva's node operators form a P2P subnet through DVT technology, allowing anyone to create validator nodes permissionlessly and manage validator clients using shared keys. According to Diva's official documentation, Diva operators only need 1 ETH to set up and run their own validator nodes, which is significantly lower than the minimum requirement of 32 ETH for a single Ethereum node.

Distributed Node Network

Diva's validator nodes primarily run the Ethereum execution client, Ethereum consensus client, and Diva client. The Diva client is open-source, allowing nodes to register in the Diva smart contract, synchronize client data, etc. Each Diva validator is a distributed validator operated by randomly composed subnets to promote node diversity and decentralization. Nodes coordinate operations with other nodes by holding different shared keys.

Unlike other LSD solutions, Diva node operators cannot access the funds or private keys of the validator nodes at any time. Multiple operators must reach a consensus through shared keys when signing. Diva employs Distributed Key Generation (DKG) and Multi-Party Computation (MPC) technologies to split the validator node keys into shared keys using BLS threshold signatures (Boneh–Lynn–Shacham). All node actions require the consensus signature of at least two-thirds of the nodes in the subnet committee to reduce the risk of collusion attacks and private key loss, while also enhancing fault tolerance for node failures. As a result, Diva node operators do not need advanced server management skills, providing greater flexibility.

Additionally, node operators need to provide a certain amount of ETH as collateral to be assigned to operate validators, ensuring that the interests of operators and staking users remain aligned. If an operator misses any validation duties, the collateral will be transferred to the staking users as compensation for their potential losses, while operators fulfilling their duties will receive a certain proportion of the staking rewards. The rewards earned by operators are the sum of their own staking earnings and the distribution of staking user earnings.

Diva Smart Contract

The main functions of the Diva smart contract are to stake and withdraw ETH, mint divETH, and package wdivETH. Additionally, operators can register shared keys for new validators through the smart contract. Staking users deposit ETH and receive interest-bearing certificates divETH in a 1:1 ratio, and can use divETH to request ETH withdrawals from nodes.

divETH is a non-rebase interest-bearing asset, serving as the liquid staking certificate for staking users. 1 diveETH will always be backed by 1 ETH and will accumulate staking rewards over time. As Ethereum blocks and staking rewards are generated, the balance of staking users' diveETH will continuously grow to reflect the potential reward value of their staked ETH.

The Diva smart contract automatically updates the divETH balance in users' wallets daily, allowing staking users to passively earn rewards without any obligations to the Diva protocol. It is expected that after the Ethereum Capella upgrade on March 23, users will be able to unstake at any time and exchange ETH using divETH.

Users can also package divETH into wdivETH through the Diva smart contract. wdivETH is a non-rebase asset primarily used to facilitate the composability of divETH with the broader Ethereum ecosystem. The balance of wdivETH will not change over time or with the accumulation of staking rewards; its value will appreciate over time and with the accumulation of staking rewards. Therefore, the wdivETH in users' wallets will be a static value, changing only when users conduct transactions. When users wish to withdraw ETH, they must first unpack wdivETH into divETH and then further unstake their ETH.

As a public infrastructure, all of Diva's infrastructure and smart contracts are open-source, but the contracts themselves are non-upgradable, designed to maintain the predictability of the protocol and minimize potential attack risks. If there are issues with the smart contracts, there are protective mechanisms in place to minimize the potential impact on all parties involved.

P2P Network & Oracle

Diva has also created a P2P network among nodes for node discovery, allowing communication within the network to occur directly between nodes. This helps to avoid potential delays that could affect validation performance and minimizes single points of failure. Through this P2P approach, Diva also maintains decentralization and censorship resistance. Furthermore, the P2P network allows DKG to be executed in a completely decentralized manner, thereby protecting the privacy and security of all data transmissions.

Currently, Diva's operation still requires the assistance of oracles. Because Ethereum's execution layer (executing blocks, transactions, and smart contracts) and consensus layer (validation and consensus mechanisms) are separated, Diva's smart contracts cannot directly access the state of the validator nodes. Without receiving information from the consensus layer, Diva cannot directly check the execution status of its validator nodes. Ethereum's EIP-4788 proposal will address this issue well, but until then, Diva still needs to use oracles.

Anticipated Heat from the Shanghai Upgrade

According to official documentation, Diva will soon open its testnet and gradually release the initial version of Diva, with the mainnet expected to launch in the coming months. After the Diva mainnet goes live, it will be rolled out in two phases. In the first phase, staking users will receive 100% of the staking rewards, while operators will need to meet higher reliability and security requirements. In the second phase, staking users and operators will share the staking rewards, and operators will be able to operate in a completely trustless manner.

The upcoming Ethereum Shanghai upgrade in March will allow users to withdraw their staked ETH, which will lead to a significant increase in the amount of ETH staked in the following months, providing greater growth space for LSD sector projects. Before that, paying attention to Diva and continuously interacting with its testnet may yield considerable benefits. Meanwhile, BlockBeats reminds readers that protocols in the testnet phase often experience unpredictable failures, and users should be aware of the associated risks.