The second chapter of our Q1 2023 Quarterly Insights comprehensively examines the evolution of shared security in PoS networks. It delves into the various strategies employed by different networks to implement shared security, shedding light on the incentives and risks involved. This article distills the key takeaways from our research, offering a succinct summary of the various approaches to shared security.
What is shared security?
Shared security is a form of improving the safety of a blockchain by using resources from other blockchains. It works similarly to merge mining in PoW networks, where miners use one blockchain to mine another.
To make this concept work, there needs to be at least one blockchain providing security and another one using it. The system must allow for penalties if either blockchain misbehaves, usually by reducing their stake.
Use Cases
There are two key motivations behind the concept:
Different approaches to shared security
Rollups
Rollups, or ‘Layer 2s’ are shared security solutions that take execution off the main chain to scale computation and memory while keeping settlement on the Layer 1 chain.
Essentially, Rollups democratize execution by offering a fully compatible environment for easy application deployment and value transfer, but lower transaction cost. They guarantee security through smart contracts deployed on the Layer 1 to store transaction data, monitor state updates, and track user deposits.
There are two types of rollups: Optimistic and Zero-knowledge (ZK)
*A State Transitions is a change in the overall state of the network, which can occur when a user sends a transaction that updates the state of their account or interacts with a smart contract that changes the state of the network.
Eigenlayer
EigenLayer is a protocol built on Ethereum that allows users who hold ETH or ETH liquid staking tokens to restake their tokens and earn additional rewards. Restaking involves users giving their tokens to a service, which uses the tokens to secure its own network and other networks.
However, by doing so, users take on the risk of being slashed if they act maliciously according to the rules set out in the service's slashing contract.
EigenLayer uses the slashing contract to determine whether a user has acted maliciously and to slash their tokens accordingly. The protocol is currently on testnet and has recently raised $50 million in a Series A funding round led by Blockchain Capital, with participation from Coinbase Ventures and Polychain Capital.
ICS: replicated and mesh security
Replicated security, a system that first went live on the Cosmos Hub in March 2023 as the initial version of the Interchain Security protocol (“ICS”), allows other Cosmos chains to apply to get the entire security of the Cosmos Hub validator set.
In other words, by participating in ICS, a consumer chain can leverage the security of the Cosmos Hub validator set to ensure that its own blockchain is secure. This is done by having the validators of the Cosmos Hub also run the code of the consumer chain, and being subject to slashing for any downtime or fraudulent behavior.
However, there are some challenges with this approach, such as scaling issues and the potential for poor performance if the validator set of a consumer chain secured by multiple providers grows too large.
To address these challenges, a new approach called Mesh Security was proposed by Sunny Aggarwal, the CEO of Osmosis. Mesh Security allows for delegators on the provider chains to re-delegate their tokens to validators on the consumer chain's own validator set, without any additional overhead. This means that operators who already run nodes for both the provider and consumer chain can be delegated more voting power on the consumer chain, resulting in an approach that is similar to what EigenLayer is proposing for Ethereum.
Babylon
Babylon is a project that aims to improve the security of Cosmos zones and other PoS chains by using the security of Bitcoin. It is made up of three components:
Babylon operates by receiving streams of transaction data checkpoints from multiple PoS chains and then combines these checkpoints into a single stream which is posted to Bitcoin. To achieve this, it uses the IBC (Inter-Blockchain Communication) protocol to trigger a transaction sent to the miners. This transaction is added to the Bitcoin ledger, effectively timestamping the events occurring in other blockchains through a process known as ‘checkpointing’.
Currently, Babylon is on testnet, and 13 Cosmos zones are experimenting with it.
Overall, shared security aims to improve decentralization of applications and increase the cost of corruption of lower value networks. However, despite its advantages, shared security also carries inherent risks. It can compromise decentralization, opening doors to higher levels of contagiousness during stress scenarios. Additionally, it may introduce risks to smart contract implementations, as users may lose their tokens due to factors outside of the base protocol layer.
Read the full, in-depth analysis of shared security at https://chorus.one/reports-research/quarterly-network-insights-q1-2023 .
Chorus One is one of the biggest institutional staking providers globally operating infrastructure for 40+ Proof-of-Stake networks including Ethereum, Cosmos, Solana, Avalanche, and Near amongst others. Since 2018, we have been at the forefront of the PoS industry and now offer easy enterprise-grade staking solutions, industry-leading research, and also invest in some of the most cutting-edge protocols through Chorus Ventures. We are a team of over 50 passionate individuals spread throughout the globe who believe in the transformative power of blockchain technology.
The Shapella Upgrade was completed in April, marking a significant event for both Ethereum and the entire crypto industry. This upgrade combined changes to both the Execution Layer (Shanghai upgrade) and Consensus Layer (Capella upgrade), allowing for the withdrawal of staked ETH and any accumulated staking rewards.
Shapella was a major stride towards greater flexibility and accessibility in staking on the Ethereum network. With the ability to withdraw staked ETH and rewards, the pivotal event galvanized institutional interest in the second-largest cryptocurrency by market value.
In this article, we’ll explore how the Shapella upgrade has sparked increasing interest in ETH staking among institutional investors, and why this trend is expected to continue.
A look back…
Let’s start by examining how we arrived at the current situation and why withdrawals were not enabled during the Ethereum transition from Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism.
The Ethereum network transitioned from Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus mechanism in two stages, starting with the launch of the Beacon Chain, followed by the Merge. During this time, staking withdrawals were not enabled to ensure network security and reduce the risk of failure. Validators were able to exit, but customers could not unstake their staked ETH.
Despite knowing they would be unable to withdraw their ETH for some time, the initial network participants contributed millions of ETH to secure the Ethereum PoS network.
To ensure the upgrade went smoothly, it was implemented without any downtime. And the focus was solely on making this transition as seamlessly as possible. As a result, no other features or changes were added at that time. The goal was to minimize the chances of anything going wrong and to keep the Ethereum network running smoothly for all its users. ETH withdrawals were not enabled, until Shapella.
Why Institutions hesitated to stake ETH before Shapella
Prior to Shapella, staking ETH involved significant risks due to uncertainty surrounding withdrawals. This made institutions hesitant to stake their assets, as they needed quick access to them if necessary.
In fact, despite ranking second in market cap, only 15% of the total ETH supply was staked, a remarkably lower percentage than other tokens such as Solana, which has over 70% of its total supply staked.
Another reason for the lack of institutional participation in ETH staking was the general unclear regulatory stance regarding digital assets globally.
For instance, in late 2021, the SEC sent Kraken, one of the largest US exchanges, a Wells notice regarding its staking services. According to the SEC, Kraken's staking service constituted a security offering and required registration with the Commission. Kraken disagreed with the SEC's position and argued that staking fell outside its jurisdiction and was not a security offering. Despite its stance, Kraken suspended its staking services for US customers due to concerns over the regulatory environment and uncertainty surrounding the SEC's position on staking.
As a result, institutions feared that what happened to Kraken would apply to all staking providers, although Kraken's situation was a one-off and would not affect someone who staked their assets through a trusted non-custodial staking provider like Chorus One.
Here's why a situation like this is unlikely to happen to a non- custodial staking provider or validator like Chorus One:
The Silver Lining: Why ETH staking is more appealing to Institutions post-Upgrade
Since Shapella, the level of staking is on an upwards trajectory, despite shaky grounds.
The amount of ETH being staked has been steadily increasing, with large amounts of capital being locked up to earn 4 to 5% yields in ETH.
Source: Dune Analytics
Approximately 655k ETH ($1.2M) has been deposited since the upgrade, with the ‘largest weekly token inflow in ether staking’s nearly two-and-a-half-year history’ seen just two weeks following Shapella. The surge was largely driven by enterprise-grade staking providers and institutional investors seeking to reinvest their rewards following withdrawal.
At the time of writing, there are approximately 19M staked ETH, and deposits continue to surpass withdrawals.
The growing amount of staked ETH is a promising indicator for the adoption and security of Ethereum. Now that yields are available, institutional investors are likely to be even more interested in staking ETH. In fact, there has already been a strong influx of institutional interest in ETH futures following the upgrade, indicating positive staking momentum among larger investors who are looking to increase their revenue.
Additionally, the first week of May 2023 saw a surge in staked ETH deposits as investors raced to stake their tokens with validators. According to Nansen, over 200,000 ETH was deposited into the network, marking the first time since Shapella that deposits outpaced withdrawals. This recent surge has resulted in over 19 million ETH being locked for staking, which accounts for about 15% of the total circulating supply of ether.
Shapella benefits institutions by providing them with the opportunity to get liquidity on their staked ETH and earn a yield of 4% or more while participating in securing the network. It essentially derisks staking, which increases the intrinsic value of the asset and makes Ethereum even more attractive to institutions. This reduction in perceived risks associated with staking makes it more likely for risk-averse holders to consider staking, which could bring more institutional investors to Ethereum staking.
In conclusion, the Shapella upgrade sparked significant positive changes to the Ethereum network - particularly in terms of staking - and paved a secure way for institutions to get involved in supporting the growth of the network.
As a leading staking provider, Chorus One is dedicated to making the staking process easier, secure, and compliant for our customers. Our multi-chain staking solution, OPUS, is safe, secure, and compliant, making it easy for institutions to start staking with a few simple clicks. Learn more about OPUS here and contact us at staking@chorus.one to learn more about how we can help you get started.
Chorus One is one of the biggest institutional staking providers globally operating infrastructure for 40+ Proof-of-Stake networks including Ethereum, Cosmos, Solana, Avalanche, and Near amongst others. Since 2018, we have been at the forefront of the PoS industry and now offer easy enterprise-grade staking solutions, industry-leading research, and also invest in some of the most cutting-edge protocols through Chorus Ventures. We are a team of over 50 passionate individuals spread throughout the globe who believe in the transformative power of blockchain technology.
After three rounds of rigorous testnets, the Sui Network Mainnet is live, and Chorus One is proud to support the network as a genesis staking provider and validator.
What is SUI?
Sui Network is a permissionless Layer-1 blockchain and smart contract designed from the ground up to make digital assets ownership fast, secure, and accessible to the next generation of Web3 users. Its pioneering architecture is implemented to create a world-class developer experience, in addition to vastly improving performance and user experience of L1 blockchains.
Sui Move
Sui uses Rust and supports smart contracts written in Sui Move - a customized version of the Move programming language that enables the definition and management of assets with owners. These assets can be created, transferred, and mutated through custom rules defined in the smart contract, offering a flexible way to manage digital assets on the blockchain. This enables a vast range of use-cases such as tokens, virtual real estate, and more.
SUI’s unique design features
Sui has a unique system design that allows it to scale horizontally and handle a high volume of transactions at low operating costs. Unlike other blockchains that require global consensus on all transactions, Sui enables parallel agreement on independent transactions through a novel data model and Byzantine Consistent Broadcast. This approach eliminates the need for global consensus and enhances scalability without compromising safety and liveness guarantees.
The object-centric view and Move's strong ownership types enable parallel execution of transactions that affect different objects while transactions that affect shared state are ordered through Byzantine Fault Tolerant consensus and executed in parallel.
Sui’s scalability characteristic is highly innovative and distinct from existing blockchains that have bottlenecks. Currently, most blockchains have limited capacity to handle a high volume of transactions, resulting in slow processing times and expensive fees. This can lead to a poor user experience, particularly in gaming and financial applications. Sui addresses these issues by scaling horizontally to meet the demands of applications. It does this by adding more processing power through additional validators, resulting in lower fees and faster processing times even during periods of high network traffic.
Sui allows developers to store complex assets directly on the blockchain, which makes it easier to create and execute smart contracts. This results in low-cost and horizontally scalable storage that enables developers to define rich assets and implement application logic. With this capability, new applications and economies can be created based on utility without relying solely on artificial scarcity.
SUI Tokens
Sui’s native token, SUI, has a fixed supply and is used to pay for gas fees. Additionally, users can earn rewards by staking their SUI tokens with validators like Chorus One. To learn more about how you can stake SUI with Chorus One, visit: https://chorus.one/articles/how-to-stake-sui-sui-network
Sui Use Cases
Sui enables developers to define and build:
Staking $SUI with Chorus One
SUI can be delegated to Chorus One delegation pool
Current Staking APR: 8.3%
For any other questions, reach out to staking@chorus.one
Useful links, tools, and resources
Website: https://sui.io
Twitter: https://twitter.com/SuiNetwork?ref_src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Eauthor
Docs: https://docs.sui.io/learn/about-sui
Explorer: https://suiscan.xyz/mainnet/home
Discord: https://discord.com/invite/sui
GitHub: https://github.com/MystenLabs/sui
About Chorus One
Chorus One is one of the biggest institutional staking providers globally operating infrastructure for 40+ Proof-of-Stake networks including Ethereum, Cosmos, Solana, Avalanche, and Near amongst others. Since 2018, we have been at the forefront of the PoS industry and now offer easy enterprise-grade staking solutions, industry-leading research, and also invest in some of the most cutting-edge protocols through Chorus Ventures. We are a team of over 50 passionate individuals spread throughout the globe who believe in the transformative power of blockchain technology.
Sui is a Layer 1 blockchain and smart contract platform designed to make digital asset ownership fast, private, secure, and accessible to everyone.
Overview
In case you don’t have the SUI wallet extension installed on your browser already, visit https://chrome.google.com/webstore/detail/sui-wallet/opcgpfmipidbgpenhmajoajpbobppdil and Install the extension.
Click on ‘Install SUI for Chrome’ if you are using a Chrome browser or Brave if you are using the Brave browser and follow the installation instructions.
Click on the extension in the Chrome/Brave toolbar and the following page will open up.
Click on Get Started to create your account. Then, create a secure password for your wallet.
| You will be shown 12 words as your mnemonic seed. Back it up securely (read the warning below)
| Back up your mnemonic seed securely
Finally, click on Open Sui Wallet to create your account.
3. Log in to your account
Once you have created your account, click on the extension to view your address.
4. Stake your SUI
If you don’t already have SUIs in your account, fund it with some tokens. You may use an exchange to transfer the SUI tokens to your address or get it from someone who already holds them.
Ensure you’re on the correct network - Mainnet.
Click on “Stake & Earn SUI”
Find “ Chorus One” validator in the list and verify that the validator address by visiting https://explorer.sui.io/validator/0xd6edebcfa598dcb6e71037b34f09ddc6a20dd874edca1d89d5ccd11ec070d040 and confirming that the Chorus One address is 0xd6edebcfa598dcb6e71037b34f09ddc6a20dd874edca1d89d5ccd11ec070d040.
Select and click “Select Amount”. Enter the amount of SUI tokens you want to stake.
Click on “Stake Now”.
Over time you will see rewards getting accumulated in your account. You can simply go to the SUI extension to claim them.
How to Unstake SUI
1. To unstake, log into your account and click on "Currently Staked".
2. Select the amount of SUI tokens that you want to unstake.
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