ETH Staking Risks & How Byzantine Mitigates Them

As Ethereum continues to evolve with its proof-of-stake (PoS) consensus mechanism and new innovations around restaking, staking has become the cornerstone of the network’s security and functionality.

Staking is a low-risk investment in DeFi. However, while low-risk, it is not zero-risk, the most significant of which is slashing. In this article, we’ll explore what slashing is, how Byzantine Finance mitigates it, and which other possible risks of staking are notable, in order to provide a secure and efficient staking experience for institutional and professional investors.

What is Slashing?

Slashing is a penalty mechanism designed to deter malicious or negligent behaviour on the Ethereum network. Validator nodes are backed by collateral (the stake) and validators who fail to perform their duties - i.e. validating transactions or maintaining uptime - or who act maliciously (e.g., by proposing multiple blocks for the same slot) can have a portion of their staked ETH slashed as a penalty.

While slashing is essential for maintaining network security, it poses some risks for stakers, including:

• Financial Loss: Slashed validators lose a portion of their staked ETH, reducing their overall returns.
• Operational Disruption & Lost Revenue: Slashing can lead to the removal of a validator from the network, disrupting staking operations.

How Likely is Slashing to Occur?

While slashing is a well-known risk in Ethereum staking, it is important to note that slashing is extremely unlikely for well-operated validators. At the time of writing, the total number of slashing events has been fewer than 300 - in a system with over 7.5m attestations to date. The number of slashing incidents has been minimal, and the vast majority of validators operate without issue. Slashing typically occurs only in cases of severe negligence or deliberate malicious activity, such as running duplicate validator instances or failing to maintain proper node uptime.

For institutional and professional stakers, the risk of slashing can be further mitigated by working with experienced operators, using reliable infrastructure, and adhering to best practices in validator management. At Byzantine Finance, we prioritise these measures to ensure that slashing remains a rare and avoidable occurrence for our users.

How Byzantine Mitigates Slashing Risks

The Byzantine protocol is designed to mitigate slashing risks and ensure a secure & reliable staking experience:

1. Zero-Slashing History and Validator Performance Data

One of the most effective ways to mitigate slashing risks is to work with validators that have a proven track record of reliability. Byzantine Finance provides clear, transparent data about validator performance, including:

• Uptime: The percentage of time a validator has been operational.
• Slashing Incidents: A history of any slashing events associated with the validator.

By prioritising validators with zero-slashing history and high uptime, we ensure that our users’ staked assets are in safe hands.

2. Distributed Validators (DVs) for ETH

To further reduce slashing risks, stakers can decide to have their Byzantine vaults employ a distributed validator (DV) strategy. Instead of relying on a single validator, this distributes staked assets across multiple institutional-grade validators. This approach:

• Reduces the impact of any single validator’s failure.
• Ensures continuous staking operations even if one validator is slashed.

3. Institutional Validators Only

Byzantine Finance works exclusively with institutional validators that meet stringent performance and security standards. These validators are operated by trusted providers with a proven track record in the staking ecosystem. By using multiple providers through the Byzantine gateway, users benefit from enhanced security and reliability.

When deploying their vault and creating their strategy, stakers have the right to choose a specific validator they trust to validate their assets.

4. Segregated vaults

Importantly, Byzantine vaults are fully segregated. In other words, slashing incidents in one vault do not financially or operationally affect the others.

5. Slashing insurance

For added peace of mind, Byzantine Finance supports slashing insurance options through a set of insurance partners. These insurance products can protect users against financial losses in the rare event of a slashing incident, ensuring that their staked assets remain secure.

Counterparty Risks and Byzantine’s Non-Custodial Approach

In addition to slashing risks, stakers must also consider counterparty risks—the risk that a third party (e.g., a custodian or staking provider) could mismanage or lose their funds. Byzantine Finance eliminates counterparty risks through its non-custodial architecture:

• Control Over Funds: Users retain full control of their staked assets at all times. There is no need to transfer funds to a third party, reducing the risk of loss or mismanagement.
• No Need to Move Funds from Custodians: Byzantine’s protocol integrates seamlessly with existing custodial solutions, allowing users to stake directly from their preferred custodian without moving funds.
• Audited Protocol: Our platform is built on audited, secure smart contracts, ensuring that users’ assets are protected against protocol-level risks.

By cutting out unnecessary intermediaries and reducing reliance on additional protocols, Byzantine Finance minimises counterparty and protocol risks, providing a safer staking experience.

Liquidity and Volatility Risks

Staking on Ethereum also involves liquidity and volatility risks, primarily due to the unstaking timeline. When users decide to unstake their ETH, there is a waiting period before the assets become liquid. During this time, market volatility can impact the value of the staked assets.

How Byzantine Addresses Liquidity Risks

• Transparent Unstaking Timelines: Byzantine provides clear information about unstaking timelines, helping users plan their staking strategies effectively.
• Risk Mitigation During Volatility: By offering diversified staking options and access to real-time risk data, Byzantine enables users to make informed decisions and adjust their strategies during periods of market volatility.

Conclusion: Secure Staking with Byzantine Finance

Slashing, counterparty risks, and liquidity challenges are inherent to Ethereum staking, but they can be effectively managed with the right tools and infrastructure. At Byzantine Finance, we are committed to providing a secure, efficient, and user-friendly staking experience for institutional and professional investors.

By leveraging zero-slashing validators, dsitributed validator options, non-custodial architecture, and vault segregation, Byzantine Finance mitigates the risks associated with staking, ensuring that users can participate in Ethereum’s PoS ecosystem with confidence.

Join the Future of Secure Staking

At Byzantine Finance, we believe that staking should be accessible, secure, and rewarding for everyone. Whether you’re an institution looking to optimise your staking strategy or a professional investor seeking reliable yield, Byzantine Finance is here to help you navigate the complexities of Ethereum staking with ease.