Independent validators are crucial to Ethereum’s security, decentralization, and censorship resistance. They run distributed nodes across the globe and cannot easily be swayed. However, they face several key challenges:

• [ ] High Participation Threshold: The 32 ETH staking requirement is a significant barrier for many potential participants.
• [ ] Opportunity Cost: The locked-up capital is far greater than the potential loss from validator misbehaviour (i.e., slashing).
• [ ] Limited Liquidity: Independent validators cannot easily stake their equity and obtain leverage while operating their validator.
• [ ]

To address these issues, we propose the SOLO protocol, which supports permissionless minting of liquid staking tokens (LSTs) for portions of the stake that are unlikely to be lost, even in the event of slashing. After the Pectra upgrade, this enables minting for up to 96.1% of the stake, unless both a significant slashing event and extended inactivity penalties occur. This will reduce the entry cost for independent validators to just 1.25 ETH. The protocol also enables independent validators to effectively borrow against their otherwise illiquid staked portions.

Our mechanism creates a unified, homogenous LST across all validators, without relying on governance, trusted hardware (e.g., SGX), or permissioned operator sets. The protocol leverages Pectra’s EIP-7002 (enabling consensus layer withdrawals triggered by the execution layer) and EIP-7251 (increasing the staking limit flexibility for multi-node validators by adjusting the “maximum effective balance”). Validators simply need to submit their withdrawal credentials to the protocol.

To counteract the reduced costs that could arise from a 51% attack on Ethereum and prevent any single validator from gaining dominance, the protocol employs an economic anti-centralization mechanism. This dynamically limits the achievable leverage, disproportionately hindering large validators, aiming to prevent any single entity from gaining excessive control over Ethereum.

Background

Ethereum’s protocol uses two types of negative incentives for validators: penalties and slashing. Validators who miss proving or syncing committee duties are penalized. These penalties are relatively mild, allowing validators to recover from a day of downtime and about a day of normal operation.

However, slashing is much more severe. It applies to serious protocol violations, such as proposing or proving multiple blocks for the same slot. This penalty consists of four parts:

• [ ] Initial penalty: After the Pectra upgrade, this will be a slashing of 1 ETH for every 4096 ETH of effective balance. For a 32 ETH validator, the loss will be 0.00781 ETH.
• [ ] Correlation penalty for large-scale slashing events: This is typically zero, but if one-third or more of the total staked ETH is slashed within 18 days before or after the validator’s slashing, the penalty could deplete the entire validator balance. In the case of a 1% reduction in total staked ETH, a 32 ETH validator could lose up to 0.96 ETH in correlation penalties.
• [ ] Missed proving penalties: Ethereum will automatically invalidate all proofs from a slashed validator until they are in a withdrawable state, which occurs after 8192 epochs. For today’s 32 ETH validators, this penalty is equivalent to 0.0564 ETH.
• [ ] Inactive omission penalty: If the chain has not been finalized, a slashed validator incurs additional costs. A 32 ETH validator will suffer a loss of 0.0157 ETH for missing 128 epochs.
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If the total staked ETH is reduced by up to 1% and inactive omissions do not exceed 128 epochs, a 32 ETH validator could suffer a loss of up to approximately 1.04 ETH, which is only about 3.25% of their balance.

This means that, apart from special large-scale slashing events, the majority of ETH held by a single independent validator is not at risk, even if the validator engages in arbitrary misconduct.

Previous Work

In this context, many projects have explored the practice of Liquid Staking Tokens (LST):

• [ ] Justin Drake proposed an LST mechanism for independent validators that relies on trusted hardware (SGX) to prevent slashing penalties.
• [ ] Dankrad Feist introduced a two-tier staking system with separate layers for slashed and non-slashed funds.
• [ ] Lido allows ETH holders to “lend” their ETH to node operators without these operators misappropriating the funds. Their “community staking module” supports permissionless participation for independent stakers who pledge collateral.
• [ ] Rocket Pool enables independent validators to borrow up to 24 ETH for each 8 ETH they provide. However, they must also stake RPL tokens (at least 10% of the borrowed amount) and share validator rewards proportionally.
• [ ] frxETH allows individual anonymous validators to borrow up to 24 ETH for each 8 ETH they provide, but the borrowed ETH can only be used to create new validators.
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SOLO’s Unique Advantages for Independent Validators:

• [ ] It allows validators to create validators with as little as 1.25 ETH.
• [ ] It supports minting a single, homogeneous LST for any validator without relying on trusted hardware, governance, a permissioned set of operators, or staking additional tokens.
• [ ] It compensates LST holders for the time value of ETH and the risk of bad debt through market-based funding rates.
• [ ] No changes to Ethereum are needed other than the Pectra updates, EIP-7002 and EIP-7251.
• [ ] It dynamically offsets the potential risks posed by a 51% attack on Ethereum, using a mechanism that disproportionately prevents large validators from accumulating excessive stakes.
• [ ]

Protocol Overview

This mechanism draws inspiration from synthetic stablecoin systems like RAI. Node operators act as borrowers, minting a Liquid Staking Token (LST) called SOLO against the ETH staked by validators, while SOLO holders serve as lenders. If a validator’s SOLO “debt” relative to their stake becomes too high, they will be liquidated and forced to withdraw. Dynamic funding rates compensate SOLO holders for the time value of the underlying ETH and the risk of bad debt, keeping the token price close to 1 ETH.

The protocol defines a loan-to-value (LTV) ratio, where the collateral for the loan is the validator’s effective balance on the Ethereum consensus layer, which dynamically changes due to SOLO minting, financing, penalties, or validator rewards. The liquidation threshold is lower than the maximum allowable LTV and is less than 100%.

We estimate the maximum LTV to be 96.1%, with the liquidation threshold at 96.4%.

Minting and Burning

To mint SOLO, a validator’s withdrawal credential must point to an agent contract controlled by the protocol. The operator can register the validator by calling the register function. Then, the operator can mint SOLO for the validator by calling mint. The protocol also provides a method “deploy” to atomically transfer 32 ETH from the caller, deploy a new validator through Ethereum’s deposit contract, set the withdrawal credential to the agent contract, register it, and mint SOLO in one transaction.

For withdrawals, operators initiate a full exit by triggering a voluntary exit on the consensus layer or by calling the withdraw function. Partial withdrawals can only be triggered by withdrawal, ensuring that the liquidation threshold is not reached. Similar to liquidation, these actions rely on EIP-7002. After the withdrawal is completed, the operator calls the Claim function to receive ETH from the stake.

Liquidation and Slashing

When a validator’s collateral ratio drops below 1, they become eligible for liquidation, and liquidation occurs when their LTV exceeds the liquidation threshold. Once the conditions are met, anyone can trigger the liquidation process by calling the liquidate method on the validator. This call triggers the validator’s withdrawal. After the withdrawal is completed, the contract auctions off the received ETH to SOLO holders to repay the validator’s debt. Any excess ETH can be returned to the validator (or retained by the protocol as a liquidation fee). Beyond slashing compensation, SOLO holders bear the bad debt risk. At the end of the slashing process, the protocol receives any remaining staked ETH from the penalized validator. The protocol then auctions the ETH for SOLO to pay off the slashed validator’s debt, which follows a process similar to liquidation.

Funding Rates

We propose a dynamic, market-based funding rate. SOLO minters (debtors) pay this rate to SOLO holders (lenders). It works by proportionally increasing the debt, and SOLO holders benefit through continuous token rebase (similar to Lido’s stETH). If the price of SOLO falls below 1 ETH, the funding rate rises, making SOLO more attractive to hold. Conversely, if the price of SOLO rises above 1 ETH, the funding rate decreases, reducing the attractiveness of holding SOLO. In extreme cases where SOLO remains below 1 ETH for a prolonged period, the funding rate will eventually rise to a level that causes all positions to be liquidated. The rate can be capped at 0%, with no negative adjustment.

To prevent prolonged decoupling, the protocol allows infinite minting of SOLO at a 1:1 ratio against native ETH as long as the funding rate is 0%. Anyone can exchange SOLO for ETH on a 1:1 basis under these conditions. This ETH reserve must be depleted before the funding rate can rise above 0%.

In practice, any increase in protocol returns may trigger a surge in demand for SOLO, which in turn drives up the funding rate. The opposite is also true. With lower thresholds, this self-balancing mechanism becomes more efficient. Nonetheless, SOLO enables validators to deploy borrowed funds in higher-yielding opportunities while continuing to operate their validators. If these returns, when combined with validator rewards, exceed the cost of capital, this can be a potentially profitable strategy.

Validator (Anti-Centralization Mechanism)

This solution adopts a flash loan model, allowing users to directly deploy validators via DEXs and flash loan services. With a maximum LTV of 96.1%, the minimum required amount is approximately 1.25 ETH, significantly lowering the cost for independent validators.

By reducing the cost of creating validators, the protocol promotes decentralization and a surge in small validators. However, it may also lower the cost of accumulating large stakes, which could even pose a risk to Ethereum in the event of a successful 51% attack. While, in theory, both attackers and honest users can benefit from this protocol, colluding attackers may be more likely to exploit this advantage effectively. To mitigate this risk, we propose an anti-centralization mechanism: a dynamic leverage adjustment that automatically lowers the maximum LTV as the protocol’s share of total ETH staked grows.

Consider the “marginal LTV” of a single validator — the ratio of the amount of SOLO minted for each new unit of ETH staked as collateral. For anyone who has not yet used the protocol, their marginal LTV is equal to the maximum LTV. But for anyone who has already used the protocol (especially large-scale participants), the calculation is different. Due to the anti-centralization mechanism, each additional unit of collateral deposited increases the LTV of their entire stake, which requires them to deposit additional collateral to support all of their existing SOLO debt. This means that the marginal LTV for large validators is actually lower than that of smaller validators. Users who have already used a large amount of collateral face a lower marginal LTV compared to smaller users. The chart below illustrates the two effects of the anti-centralization mechanism. The red line represents the marginal LTV for small stakers using SOLO as a function of the total staked percentage using SOLO. The blue line shows the marginal LTV for stakers who already control half of the SOLO supply.

Importantly, this mechanism does not rely on any identity-based anti-sybil mechanisms. Attackers cannot avoid it by distributing their holdings across multiple validators or consolidating a large amount of ETH into a single validator. This anti-centralization mechanism provides an economic disincentive for large stakers accumulating shares via SOLO.

SOLO addresses the main challenges faced by independent validators: high entry barriers and limited liquidity for their staked assets. In summary, we believe this mechanism can make solo validation more attractive.

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