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Decentralized identity, credentials, decentralized justice, and a quality operator set.
This is a research project that Nethermind is currently conducting on behalf of Lido.
The problem
Lido is a liquid staking protocol that converts ETH to a liquid token and stakes the funds on the Beacon Chain. It relies on external parties, called operators, for validators. Operator candidates must currently be approved by the Lido DAO through a voting process, granting the DAO a great deal of power. Ideally, the onboarding process should be permissionless without input from the DAO, while remaining as capital-efficient as possible.
The solution
As part of our collaboration with Lido, we engaged in a multi-phase research project spanning the following subjects:
Phase 1 of our project focused on systematizing knowledge for decentralized identity and verifiable credential schemes, intending to utilize these to facilitate Sybil resistance. We looked at classical results, academic research, and projects that aim to implement these primitives, with special attention given to projects from the Web3 space.
Phase 2 of our project explored the research and design considerations behind a decentralized dispute resolution mechanism for the Lido protocol, created to punish misbehaving operators. The mechanism focused on achieving white-labeling resistance—that is, preventing node operators from delegating their duties to a third party without the protocol’s knowledge, thus impeding the centralization of stake or protocol takeover by a third party. To this end, we first conducted a systematization of knowledge on decentralized justice protocols, which we leverage in our design of the dispute resolution mechanism.
Future research directions may involve further analysis and design of a Sybil-resistant mechanism, as well as utilizing reputation systems for permissionless operators and their performance.
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Lido is a liquid staking protocol that converts ETH to a liquid token and stakes the funds on the Beacon Chain. It relies on external parties, called operators, for validators. Operator candidates must currently be approved by the Lido DAO through a voting process, granting the DAO a great deal of power. Ideally, the onboarding process should be permissionless without input from the DAO.
Phase 1 of our project focused on systematizing knowledge for decentralized identity and verifiable credential schemes. We looked at classical results, academic research, and projects that aim to implement these primitives, with special attention given to projects from the Web3 space. In the following phases, we will address:
Sybil and White-label Resistance: To preserve decentralization and remove any single points of failure preventing any one operator from controlling too much staked funds is crucial. We will design a mechanism that makes it difficult for a party to onboard multiple operators without disclosing that the operators are connected, or to run the operator through a white-label operator without running the operator themselves.
Reputation system: Onboarded operators are paid for performing their duties. A reputation system is needed to trace the operators’ performance, measure how much they contribute to the quality of the operators’ set, and pay rewards accordingly.
Permissionless operators onboarding: We will design a decentralized system to permissionlessly onboard operators. The system will verify their credentials, such as who they are and whether they can perform the necessary tasks, using web3 primitives such as oracles, token-curated assets, and prediction markets.
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