Proof-of-Stake on Ethereum and Cardano: Running a Validator Node

Introduction:

A blockchain is a distributed ledger, where many computer nodes all maintain copies of the same transactions and data. New transactions from network users are put together and finalized by one of these nodes; this is called “minting a block.” Other nodes in the network check the work and agree that the block is correct, in a process called consensus. So the work of every node in a blockchain network is threefold: maintaining an updated copy of the ledger, minting new blocks when their turn comes up, and validating other new blocks.

These “nodes” are the heartbeat of a blockchain, ensuring its security, accuracy, and reliability. But how does it work? Who participates in running a node, and why? Let’s cover some basics first, and then take a look at how validators work in Ethereum and Cardano specifically.

How does it work

The work of a blockchain node depends first on what kind of consensus mechanism the network uses: Consensus on Ethereum & Cardano. In a “Proof-of-Work”(PoW) consensus system like Bitcoin, the nodes work to solve complex math problems in order to win the right to add blocks of data to the network’s global history. In those systems, the nodes are often called “miners.”

Ethereum and Cardano both use a consensus mechanism called “Proof-of-Stake” (PoS). In a PoS network, validators are chosen to mint blocks based on the number of coins they hold and are willing to “stake”, or lock up, as collateral.

Since we are focused on comparing Ethereum and Cardano, we will focus on how validating works in a PoS system:

Staking/Delegation: A potential validator locks up a certain amount of the network’s native cryptocurrency they own as stake. Selection: Validators are chosen to create a new block of data based on their stake, availability, and some randomness. The specific details differ between networks. Validation: Once chosen, the validator will validate incoming transactions, ensuring they abide by the network’s rules. Every validator has a local copy of the network rules so validation is performed independently without having to talk to a remote server. Block Addition: After validation, the validator proposes the block of transactions to be added to the blockchain global history. The rest of the validators on the network will need to affirm and agree to your proposed block of transactions. Reward: If the block is added successfully by the rest of the validators, the validator receives a reward in the form of transaction fees, new coins, or the combination of both.

A validator then, requires some computer hardware, some specialized software, and one or more humans to run and maintain it.

Who wants to be a Validator?

Running a validator node requires a blend of technical know-how, computer infrastructure investment, and a deep understanding of the specific blockchain’s workings. Here are some typical characteristics of people who run validator nodes:

Tech Enthusiasts: Given the technical nature of setting up and maintaining a server node, many validators are individuals who are passionate about technology and blockchain.

Institutional Investors: Big financial players who see the value and potential returns from staking their holdings. This group often partners with a technical person or service to do the technical work. This kind of collaboration can often provide a high yield with low risk on some PoS networks.

Blockchain Projects: Teams who are developing on the blockchain might run their own nodes to support the network. This can also give them the advantage of speeding up their Decentralized applications (DApps) or opportunity to extract value from the transactions they are validating.

Entrepreneurs: Many choses to run a node as a startup business opportunity. This more often than not means running multiple validation nodes and having a large enough stake to produce hundreds and thousands of blocks every month to be profitable.

Crypto Veterans: Those who’ve been in the community long enough and possess substantial holdings might see running a node as a natural evolutionary step or a way to give back.

Validating on Ethereum and Cardano

Running an Ethereum Node

When you sign up to help validate on Ethereum, you get put into a queue that limits the rate at which new validators can join the network. As of this writing, the wait is 0 seconds. A week ago it was 1hr 45 mins. In June 2023, the wait was 45 days.

Validadors must stake a minimum of 32 Eth as collateral to participate as a validator and create new blocks. As of this writing, the dollar value of 32 Eth is about $50K, so the startup cost to run an Ethereum node is not an insignificant consideration.

Ethereum validators have to run three pieces of software. Because of the age and open nature of Ethereum, multiple vendors produce their own implementations of each piece of software. Picking the wrong vendor could mean poor performance, leading to a penalty in the form of losing some of your staked Eth.

Validators are chosen to create a new block based on the amount of Ether they’ve staked and for how long, making the network energy-efficient compared to PoW.

Validators can lose all or some of their 32 Eth if they happen to be in a group judged to be malicious, or poor participants according to predefined network rules and key performance indicators. In February 2021 a group of 75 validators, named “Staked,” were slashed 18 Eth, valued at ($30,000 USD at the time). The group provided this summary of the event: “Staked chased technical performance over double-signing robustness and that’s not a good trade off. No customers were harmed in this interaction but it was an expensive lesson for Staked and we are sharing our learnings in case they help others.“

Ethereum’s PoS is very complex. Not every role is compensated directly by the blockchain. As a result, one of the roles, ‘Relays’, has centralized to a cohort of four entities handling over 90% of all Ethereum transactions as of this writing.

Ethereum’s divides how often new transactions are saved into slots and epochs. Every slot is the equivalent of 12 seconds, 1 epoch is 32 slots. Because of this division of time and the different work that happens every slot and and every epoch, transactions on Eth are considered final after 15 minutes.

Running a Cardano Node

Nodes on any PoS network are called validators. In the Cardano community, they are also commonly called Stake Pools. The individual or group that runs the node is called a Stake Pool Operator (SPO).

On Cardano, there’s no limit to how many new validators can join but all new validators have to wait 10 days to become active. Once your 10 days are over, you can join even if 10, 100, or a 1000 others also just joined.

Cardano validators only need to run 1 piece of software produced by one vendor. This probably has something to do with the fact that the Cardano validator ecosystem was only just bootstrapped in July 2020.

Cardano’s PoS mechanism, called Ouroboros, was designed with academic rigor and peer-reviewed research. Cardano’s PoS is new but has been mathematically proven to be secure.

Cardano’s time is also divided into epochs and slots. Each slot is 1 second. An epoch is 432,000 slots (or 5 days). Transactions on Cardano are considered final after 12 hours. Because Ouroboros itself, the entire blockchain, is a giant clock, there is a planned future upgrade (Ouroboros Chronos) to allow other computer systems connected to the blockchain to use Ouroboros to synchronize their clocks. The benefit of this is that it removes Cardano’s blockchain’s dependence on the internet to keep time, making it more decentralized and more secure.

To be a validator on Cardano you have to run a server and register it by depositing 500 Ada. As of this writing, the dollar value of this amount is about $150, so the financial barrier to entry is much lower. However, it is also true that most nodes will need to invest much more stake to become productive or profitable.

There is no risk of losing your 500 Ada from the network, even if you are a bad actor or perform poorly. When you deregister your server as a validator, you get your 500 Ada back.

Ouroboros in practice is very simple and all critical network participants are incentivized directly by the network. For example, the relay role on Cardano is also performed by validators. The same software you run to be a validator, is the same software you run to be a relay, you simply set what mode the software runs in. You have to run a relay instance and connect it to your validator for the validator to perform its duties. As a result, Cardano relay roles have not seen the same level of centralization as relays on Ethereum. As of this writing, there are approximately over 8,700 relays operated by at least 175 groups, plus 1,800+ single independent operators supported by 300 plus internet service providers across at least 62 countries.

Conclusion

On both Ethereum and Cardano, the roadmap for the validation role is long and filled with many more complexities to the world of validation. Up next is Ethereum’s “The Surge’’ milestone. Cardano’s next milestone in this area is dubbed Leios. Both of these milestones have aims of “massive scalability.” While this will add more complexity to the system, in addition to scalability, the upgrades will also allow more people to participate in validation and lead to cheaper transactions for users.

Whether driven by profit, passion, or a bit of both, validators play a pivotal role in the world of blockchains. As the blockchain networks continue to evolve, so too will the dynamics of validators and their motivations.