ETH Slashing Shakeup: Lido Protocol Alert

The prominent liquid staking protocol, Lido Finance, made a startling announcement on Wednesday, revealing that 20 validators associated with one of its infrastructure partners had their ETH holdings drastically reduced, a process known as slashing.

As a consequence of their actions, the affected validators, linked with the esteemed Ethereum node provider Launcnodes, have seen their penalties amounting to a hefty 20.04 ETH, which is presently valued at $30,900.

What does the term "Slashing" mean?

But what exactly does "slashing" entail? Providing an update via Twitter, Lido elucidated that the problematic validators have already been deactivated. In a subsequent communication, Lido claimed to have pinpointed the "root cause" of the slashing and promised to release a detailed analysis in the coming days. However, they emphasized that certain finer aspects are still under scrutiny.

In response to this unforeseen circumstance, Lido conveyed that the Lido DAO possesses a cover fund comprising approximately 6,200 stETH to mitigate the impact of slashing. Notably, this cover fund doesn't trigger automatically. Historically, damages of this nature have been covered by the relevant operators or through this fund.

A validator's primary function is to suggest new blocks to Ethereum's blockchain and validate the blocks proposed by others. The network is more inclined to select validators for the former role if they stake a greater amount of ETH, consequently rewarding them with more ETH over time.

On the contrary, slashing occurs when an Ethereum validator fails to fulfill its duties adequately. For instance, this could involve proposing multiple blocks at the same network block height or engaging in actions that contradict its own previous communications with the network.

Penalties for Violations

In addition to these considerations, slashing penalties can accumulate for validators that remain inactive for extended periods. Lido projected that the penalties would accumulate to 23.06 ETH before they can withdraw their ETH from the affected validators.

When factoring in infra downtime penalties and missed rewards (excluding EL rewards), the total penalty, including slashed validators, amounts to 5.663 ETH, as outlined by Lido. Launchnodes has already disbursed 25.663 ETH to compensate the affected stakers and has committed to contributing more ETH if the final penalty exceeds this amount.

Currently, Lido holds a staggering $13.7 billion worth of ETH on behalf of its stakers, constituting over 25% of the total value staked on Ethereum, as reported by DefiLlama. Notably, in the previous month, Bitcoin miner Marathon Digital experienced a similar incident, mining an invalid Bitcoin block and incurring losses in newly minted BTC, akin to a slashing event in the Bitcoin realm. Analysts later confirmed that the transactions within the block were incorrectly ordered, leading to this unfortunate event.

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