Slashing Saga: Lido's ETH Staking Woes

Martin Walker
Oct 12, 2023 at 08:37 am

Lido Finance, the prominent Ethereum staking protocol, has made it known that it encountered a rather substantial 20 instances of slashing recently. These unfortunate events were attributed to a myriad of issues, including both infrastructure and signer configuration complications, emanating from validators managed by the organization known as Launchnodes.

The regrettable incident unfolded in all its complexity on the 11th of October, around the relatively late hour of 3:30 pm UTC, as reported by the diligent team at Launchnodes. In a detailed post released on the same day, but under the pseudonym "X," Lido went on to explain that Launchnodes' validators' nodes had been taken offline, and, thankfully, the slashings have come to a temporary halt. This respite was occasioned to allow for an in-depth investigation into the underlying root causes of these issues.

This slashing saga took place within the confines of the Ethereum blockchain, and the anticipated ripple effect was projected to be around a daunting 20 Ether (ETH), equivalent to a substantial monetary loss of $1,557 per ETH, totaling a jaw-dropping $31,000. Not to be overlooked are the additional penalties imposed, all while the validators remain sidelined for necessary troubleshooting. The inactivity penalties, too, are steadily accruing, adding to the complexity of the situation.

For the uninitiated, slashing is a rather intricate process where a validator, in a breach of a blockchain's proof-of-stake consensus rules, often faces either removal from the network or a partial reduction in the amount of staked ETH offered as collateral. This multifaceted aspect of blockchain governance has indeed been thrust into the spotlight.

In a post that emerged hours later, Launchnode, the organization at the heart of the issue, admitted that these unfortunate slashing incidents could be traced back to underlying problems related to infrastructure and signer configuration. They have vowed to dig deep into the matter and are diligently working to implement measures that prevent any future incidents and, at the same time, restore the system to full operational capacity.

Lido has, however, reassured its stakers that, despite the turbulence in the protocol, they need not be overly alarmed. The only noticeable impact on them will be a reduction in their daily rewards, a reduction that will be factored into the upcoming rebase scheduled for the 12th of October.

Adding another layer of reassurance, the staking provider confirmed the existence of Lido DAO's insurance fund, holding a substantial 6,230 Staked ETH (stETH), amounting to a princely $9.5 million. The fund, however, does not trigger automatically, adhering to a designed protocol.

Lido also made a commitment to compensate stETH holders once a comprehensive "cover method" has been outlined. Meanwhile, Launchnodes has undertaken the noble responsibility of reimbursing any losses that Lido may have incurred during this complex ordeal.

It is crucial to note that this compensation process is not automatic. The reason for this manual intervention is the inherent unpredictability of the total losses incurred due to these slashing incidents.

Looking at the bigger picture, Lido stands as the undisputed behemoth among liquid staking protocols, boasting a colossal $13.8 billion in total value locked within its ecosystem, according to the watchful eyes at DefiLlama. Comparatively, the next largest protocol, Rocket Pool, appears as a mere contender with $1.7 billion locked in its embrace.

Remarkably, it's worth mentioning that, since the launch of the Beacon Chain on the 1st of December in 2020, a mere 226 validators, constituting a minute 0.04% of all validators within the Ethereum ecosystem, have experienced slashing events. This data extends up until the relatively recent period of late February 2023.

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