MOTIVATION
H2O Nodes is unique in its origin, compelled by the emergence of liquid staking pools to start a staking business. We are motivated by the challenge of diversifying the node operator set of liquid staking pools by running on-prem infrastructure in underrepresented data centers. Becoming a node operator for liquid staking pools enables us to focus on improving the health of blockchain networks while staying a lean, mission-oriented company. Our intention to primarily support liquid pools is reflected in our name, H2O Nodes.
Opportunity: Growth Of ETH Staking
While we are excited to see over 10% of ETH staked, there’s still a long way to go. Now that Ethereum has transitioned entirely to Proof of Stale, we predict that after withdrawals are implemented and market sentiment improves, the amount of ETH staked will begin to increase aggressively, creating both a challenge and opportunity for ETH staking providers.
Image source: beaconcha.in
Opportunity: Growth Of Liquid Staking
The limitations of Ethereum’s native staking mechanics created significant barriers to entry. (32ETH-only nodes, no non-custodial delegation, and locked tokens until withdrawals are implemented) However, the emergence of liquid staking pools removed these barriers to entry, encouraging much more ETH to be committed to staking. The Lido pool in particular has grown to about one-third of the supply of staked Ethereum.
While the focus remains on ETH2, liquid staking pools are beginning to become commonplace on other chains, a trend we believe will continue.
Image source: Dune Analytics
Challenge: Geographic Diversity
Its critical to the health of the network that staking pools maintain a diverse node operator set. In particular, geographic and data center diversity should limit over-exposure to any particular regions or regulatory regimes. Half of all ETH2 and Solana validators are currently located in the United States and Germany, leaving much room for improvement.
Image source: Eth2 Nodewatch
Challenge: Unhosted Nodes
With the rise of hosting services like Amazon Web Services, it’s very easy to spin up staking services. However, staking pools must be careful not to add too many node operators who rely on the same cloud service providers, as this does little to increase decentralization. 60% of all ETH2 nodes are currently running on hosting providers. Over half of all Solana validators run on Hetzner and OVH.
Image source: Ethernodes.org
Challenge: Client Diversity
Finally, on ETH there should exist diversity in the client software being run by the nodes within a staking pool. A bug or vulnerability in a single client may bring offline the nodes running that software, leading to a mass slashing event. New node operators should ensure to use client software that is being run by the minority of nodes.
Source: ClientDiversity.org
What we offer
As a team with experience running on-prem infrastructure, we believe that we can leverage our existing relationships with data center providers and devops engineers in multiple countries to help decentralize liquid staking pools. As a new team, we are a good test case for liquid staking pools to add a new validator into their ecosystem and build a relationship over time.