Ethereum stakers ‘terrified’ of slashing. Company coalition looks to make it nearly impossible

Bitcoin Suisse, a company that provides staking services for institutional clients, encountered a serious problem earlier this month — a problem that unsettles other Ethereum stakers as well.

Its newly deployed Ethereum validators — software that helps process transactions and secure the network in return for newly minted Ether — began getting “slashed,” a term that refers to taking some Ether from validators who don’t publish the correct data to the Ethereum network.

Over the course of almost two hours, nearly 100 of the firm’s validators were knocked offline and fined one Ether each — an almost $200,000 loss at current prices — for trying to publish incorrect data.

Bitcoin Suisse did not immediately return DL News’ request for comment.

While slashing exists to punish people who try to attack or cheat Ethereum’s validation system, it more commonly happens because of code bugs or human error.

Since Ethereum started allowing users to stake in 2020, validators on the network have been slashed 400 times, per beaconcha.in data.

While the financial damage caused by slashing on Ethereum has historically been much smaller than the losses from hacks or DeFi protocol bugs, many crypto security researchers worry that an event where thousands of validators are simultaneously slashed is a serious risk.

And as the Ether staking market swelled to over $57 billion this year, that risk has only become more troubling.

Bitcoin Suisse is not the only Ethereum staking provider to suffer from slashing recently. In October, 20 Ethereum validators controlled by Lido, the biggest liquid staking protocol with over $18.5 billion of deposits, were slashed, resulting in a $30,000 hit. That incident was not the first time Lido’s validators were slashed this year.

“Even very sophisticated experienced validator operators are still getting slashed,” Ann Stefan, co-founder and COO of Cubist, a blockchain key management platform, told DL News in an interview.

“Having best practices in place can really help prevent the incidence of these types of things from happening,” Stefan said.

Because slashing can occur so easily, the fear of it happening is palpable among staking providers.

“They’re all terrified of this,” Fraser Brown, co-founder and CTO of Cubist, told DL News. “The way people get slashed in practice most of the time is they just make mistakes with their infrastructure.”

Cubist has teamed up with 16 other crypto firms and protocols including Redacted, Swell, and EigenLayer to form the Secure Staking Alliance, a cross-industry partnership with the goal of making crypto staking more secure.

Within the alliance, Cubist is trying to solve the problem of slashing once and for all by making it almost impossible for stakers to be slashed accidentally.

But doing so skirts a fine line between keeping blockchains secure and making sure stakers are not unfairly punished.

Slashing serves an important purpose by protecting Ethereum from attack. But the stringent security comes with a downside — it’s easy for honest stakers to be slashed if they make a mistake.

“We ended up with this tension where the fundamental security mechanism of Ethereum is actually the fundamental insecurity mechanism for validator node operators,” Brown said.

Solving slashing

Cubist’s solution to accidental slashing is to create a layer of abstraction that validators must go through to sign off on the data they send to the Ethereum network.

Blockchains like Ethereum are very similar to databases where the current state must follow on from the previous state. If a validator tries to publish an incorrect state it gets slashed.

“It’s just a database. The problem is databases are actually kind of hard,” Brown said. “If you’re running a whole bunch of validators, you have to have a global scalable database for every validator key. That’s something you can get wrong.”

What Cubist proposes is that all validator clients must send messages to another piece of software — which Brown refers to as a “sky key” — that is better equipped to make sure the validator’s messages contain the correct data.

According to Brown, as long as the sky key has serious slashing protection, the validators that rely on it will also be safe.

“You just have to get all the hard database stuff right once and then all requests just go through that key,” Brown said.

To make sure multiple validators aren’t relying on the same abstracted key, Cubist deploys a separate instance for each validator. “If you have 100 validators there are 100 keys in the sky. One for each,” Brown said.

Beyond Ethereum staking

While Cubist’s slashing solution is most relevant to Ethereum, the most popular proof of stake blockchain, it is also relevant to other areas of staking.

One area which has previously drawn concern from Ethereum co-founder Vitalik Buterin is restaking — an upcoming blockchain feature that will allow users to double-stake their Ether on other protocols and blockchains.

Cubist has signed partnerships with both EigenLayer and Babylon — two restaking protocols — specifically to focus on protecting their ecosystems from slashing.

According to Stefan, protocols like these all have unique slashing conditions, which presents an additional layer of complexity. “It’s even more important to have anti-slashers in place on these risk taking protocols,” she said.

And while Stefan and Brown say they are confident in Cubist’s anti-slashing standards, they are also mindful of the risk of having all stakers rely on only their specific implementations.

“The standards are not saying, ‘You must use this setup, you must use this hardware,’” Stefan said. The message is, she added, here’s how to set up your infrastructure if you want to have the best chance of not messing up.

Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out to him with tips at tim@dlnews.com.