In-depth Interpretation of SSV Network Technology Principles and Development Prospects

Original Author: Crypto KOL Poopman

Original Translation: 0x711, Logicrw, BlockBeats

At the beginning of September, Ethereum LSD protocols such as RocketPool, StakeWise, and Stader Labs initiated a joint commitment to limit their market share to no more than 22% of the total staked amount, aiming to address the increasing centralization of the Ethereum staking market. However, the market leader Lido Finance, which holds a share of up to 32%, did not respond to this, sparking controversy within the community. In response, crypto KOL Poopman stated on his social media that Distributed Validator Technology (DVT) plays an important role in preventing single points of failure and achieving decentralization, and conducted an in-depth analysis of the related protocol SSV Network.

BlockBeats has organized and translated this as follows.

Background

After the Ethereum merge, the consensus mechanism transitioned from PoW to PoS. Meanwhile, PoS accelerated the growth of staking solutions like Lido and also increased the risk of protocol centralization (approximately 33% market share).

DVT stands for Distributed Validator Technology. This technology distributes the validator's private keys across multiple computers to prevent single points of failure, among other issues. In simple terms, DVT can be seen as a solution similar to multi-signature.

Here, it is necessary to explain the concept of validator node keys. After PoS, the validator node key was introduced. This key is responsible for signing on-chain operations, such as block proposals and proofs. However, the key must be kept in a hot wallet.

How DVT Works

To understand how it works, we first need to understand the four pillars of DVT:

1. Shamir's Secret Sharing and Threshold Cryptography;

2. Distributed Key Generation (DKG);

3. MPC;

4. Consensus.

Shamir's Secret Sharing

Imagine a graph where an encrypted message is on the Y-axis, and a private key is divided into 3 parts and sent to nodes A, B, and C. To decrypt the message, at least 2 parts are needed to connect the lines.

This is called ⅔ Shamir's Secret Sharing. In simple terms, Shamir's Secret Sharing is an algorithm that divides a private key into multiple nodes. Each node holds only a small part of the key, and no single node can sign a message unless a voting threshold (like 3/4 or 5/7) is reached.

Additionally, PoS uses BLS signatures, which allow multiple signatures to be aggregated into a single signature. Therefore, when nodes sign a transaction, the BLS signature combines all signatures into one that can represent the validator node's private key.

Distributed Key Generation (DKG)

However, the reality is that no party should know the private key of the validator node, as this is very unsafe for the validator. In this case, DKG attempts to solve this problem by:

Each participant makes a secret share;

Then all these shares are summed to produce the final result.

Thus, DKG is a process that creates key shares and distributes them to each node. This process requires each participant to compute the key and provide "randomness" so that no party can learn the user's private key.

Multi-Party Computation (MPC)

MPC is an important pillar of DVT. MPC allows operators to sign messages using only their secret shares without reconstructing the complete private key on any single device. This helps reduce the risk of private key centralization.

Consensus Mechanism

To reach consensus among nodes on a block, the IBFT algorithm selects one node as the block proposer and shares the block with other nodes. If consensus is reached, meaning about 66% of the nodes agree that the block is valid, the proposed block is packaged.

However, if the block proposer goes offline due to hardware/software issues in DVT, the IBFT consensus will select another DVT node as the block proposer within 12 seconds, activating the fault tolerance mechanism. (This somewhat guarantees the robustness of the blockchain.)

Brief Summary of DVT

In short, the following four technologies form the foundation of DVT:

1. Shamir's Secret Sharing and Threshold Cryptography

2. DKG

3. MPC

4. Consensus

Now that DVT is understood, let's explore the SSV network.

What is SSV Network?

SSV stands for Secret Shared Validators, recently referred to as DVT.

The concept of SSV originated from a research paper in collaboration with members of the Ethereum Foundation, aiming to decentralize the validator tasks across a group of nodes.

How Does SSV Network Work?

SSV = DVT

SSV distributes the validator's private key (or shares) across a group of nodes, ensuring:

No centralization of keys

One node does not need to trust another node to operate

Additionally, SSV has a token and a P2P market.

Uses of SSV Token

Since the SSV network provides higher security and decentralized services, users must pay SSV fees to the network and operators for incentives.

There are two main participants in the SSV network: stakers and operators.

Stakers can choose 4 operators from a list and then deposit SSV with these operators to earn ETH directly on-chain based on their chosen duration (e.g., 1 year, 6 months).

Each operator can set their own fees and compete with other operators in the P2P market.

More importantly, operators do not hold the stakers' ETH assets or earned rewards, as their role is merely to maintain and operate the validators on behalf of the stakers. However, both operators and the network will charge operational fees and network fees to users utilizing the SSV network.

Network fees are fixed costs designed by the DAO for each validator and flow directly into the DAO treasury (0xb35096b074fdb9bbac63e3adae0bbde512b2e6b6). Fees will be deducted over time from the stakers' SSV balance, which has currently accumulated approximately $10 million in TVL.

SSV DAO

SSV token holders can participate in the governance of SSV DAO and make the following decisions:

Design and adjust network fees

Operator ratings (scoring based on operator performance)

Development and decision-making for any protocol

Insights on SSV Viability

First, the SSV network is expected to see more adoption. This will lead to more stakers depositing SSV with operators for higher security and decentralized services, thereby reducing the circulating supply in the market.

In this case, the most intuitive action is to trade SSV on the secondary market.

Alternatively, you can provide liquidity for the SSV-ETH pair on Uniswap (0.3% fee tier) and earn about 64% APR / $1.76 per day for every $1000 liquidity position.

On the other hand, you might consider running a node in the SSV network and earning SSV as a service fee. The more key shares managed, the more SSV earned.

However, operators need to be aware that the appreciation of SSV does not necessarily lead to higher income. In fact, when the price of SSV rises, operators typically lower fees to attract more stakers.

Similarly, when the price of SSV falls, they will increase fees. This dynamic change in fees is also influenced by how many stakers and operators are in the market.