Running validator nodes is the most secure way to put your assets to work

Welcome to Part 1 of a 4-part series on the real and tangible benefits of running your own node.

1. Running validator nodes is the most secure way to put your crypto assets to work

2. Take your Web3 skills to the next level and boost your earnings

3. Self-sovereignty and privacy should be basic human rights

4. Promote decentralisation and make your vote count!

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Running validator nodes is the most secure way to put your crypto assets to work 🔐 

Enter the Four Horsemen of yield generation risk 🏇

Yield farming opportunities in DeFi are great places to start putting your assets to work, and the yields can often seem very lucrative, but they require you to underwrite smart contract, counterparty, asset, or price risks. There is no free lunch in the world. Even in Web3, we are always trading something for another.

Smart Contract Risks: When you use a Dapp to generate yield (e.g., as a liquidity provider in an ETH-AssetX pool), you are interacting with some smart contract of said Dapp and are hence exposed to any vulnerability that can be exploited in this smart contract. We see this all the time with liquidity pools, bridges, and users’ wallets being drained by attackers—the most recent example being the $3.3M Sushiswap exploit that occurred on 9th April 2023. At this point, it’s almost as if we hear of a new smart contract exploit every other week.

Counterparty Risks: Despite Dapps being the short-form of “decentralised apps”, many Dapps we interact with today are still far from being decentralised. This risk can materialise in the form of Dapp developers holding a majority or all of the multi-sig keys that allow them to make any changes to the smart contract you are interacting with at any time, including changing your account balances. This is usually how rug-pulls are performed.

Asset Risks: Many yield farming opportunities in DeFi require you to take exposure in a separate asset on top of the asset you want to put to work (eg. being a liquidity provider in an ETH-AssetX pool). This means that you need to be bullish AND indifferent to both assets for this strategy to make sense. “Pure” yields are possible with borrowing/lending protocols (eg. Aave, Yearn, Compound) but boy are these yields measly most of the time. Further, many Dapps artificially juice their yields with their own inflationary governance tokens.

Price Risks: “Pure” yields can be achieved with strategies such as single-staking covered call options vault (eg. dopex) or basis trading (eg. buying spot + selling futures in an upward trending market) on the desired underlying asset. However, these strategies subject you to the possibility of ending up with less of the underlying asset than you started off with (ie. risking your underlying asset). Lets call this property “stability” for the sake of our argument here and unless it is otherwise intentionally part of our strategy, we want to achieve both purity and stability of yields,

The presence of these 4 categories of risks means you either (1) have to constantly monitor the developments of not only the main Dapp that you are using to generate yield but potentially ALL other Dapps that interact with this main Dapp, or (2) can only deploy what you are willing to lose completely.

Or you run your own validator node 🤖 

Running your own validator node bypasses all 4 categories of risks described above and enables you to extract yield directly from the protocol layer (e.g., Ethereum, Cosmos, Gnosis etc).

Other than the protocol itself, there are no additional smart contracts or counterparties you interact with. Naturally, not all protocols are created equal, and you will have to make an assessment of which protocols are sufficiently secure and decentralised.

There are no asset risks because validator rewards are issued purely in the native asset staked and are (ideally) paid by the transaction fees of users. There are no price risks because you don’t have to risk your underlying asset (other than slashing events, which can be easily avoided).

One of the main drawbacks of running your own validator node, however, is the minimum capital requirement (eg. 32 ETH), which limits participation by most Web3 users. The other is the technical know-how required to operate nodes in a highly effective manner to maximise rewards.

Well, the good news is that we are making huge progress on both fronts today. On the capital requirements side, Rocketpool lets you spin up a validator node with just 17.6 ETH or 10.4 ETH and StaderLabs lets you get started with just 4.4 ETH. Projects like Stereum and Avado lower the technical barriers to entry by selling pre-configured validator node devices with a graphical user interface set up so even non-technical people can participate.

However, let’s remember that there is no free lunch in the world—in return for the lower capital and technical barriers, higher levels of smart contract and counterparty risks need to be accepted (which we will cover in detail another time!). 

Although these levels of risk are likely much lower compared to yield farming, a good grasp of how validator nodes work under the hood is still needed. Otherwise, we will not be able to properly assess our risk exposure as changes are implemented over time by the protocol or project we are relying on.

This is why our approach at Stakesaurus is to increase the technical abilities of Web3 users to meet the lower capital and technical barriers halfway. We handhold our community through a guided setup of their own validator node and operate it non-custodially while facilitating knowledge transfer over time. Our goal is for the community to be able to run their own validator nodes if they want to!