Cold wallet security with hot wallet convenience is here. What are staking vaults and how do they improve the security of the network while also providing more opportunities for you?!
This article is being published during a period marked by significant failures within certain established cryptocurrency companies. Ledger created a service that defies fundamental cryptocurrency basics – “Not Your Keys, Not Your Coins”. Now, while social media blew up and conflated this service with the use of their hardware wallet, Ledger did almost nothing to help their cause. The fundamental issue is that once your keys are given to someone else, they are no longer YOUR keys. You have given away access to your funds.
One outcome of losing sole ownership of your keys to your wallet can be seen in every successful phishing attack and the latest exploit in the popular Atomic Wallet. It is critical to participate in blockchain storage and rewards systems in a safe way!
Let’s review how participation in the security of a blockchain is rewarded over the years (we’ll keep it at a high level, ignoring the granular details of these various examples). Let’s start with Bitcoin.
In a proof-of-work blockchain network, each mining node works towards being the one that gets rewarded for adding the latest block to the ledger. This reward, in a normal configuration, is sent to a reward address in a wallet that can be assigned by the node owner. The important part to understand here is that the rewards accumulate in a place that is different than where the online work is happening. The rewards wallet can be a cold wallet on a piece of paper somewhere, those funds are secure because they are offline.
On the contrary, in early Proof of Stake concepts, instead of owning a lot of hardware to improve your chances of receiving a reward, a node owner instead uses their coins as a staking weight to improve their chances of winning a reward. The network could be envisioned as shown on the right.
It is well understood that these are “Hot” nodes. The funds exist in the same place where the validation work is being done. This means that anyone who can get access to the keys of the validation nodes will also get keys to the funds. This is generally countered with good computer security practices and hygiene. On the plus side, Proof of Stake blockchain validation is a low-energy process, which leads to far lower hardware and operational costs. Many PoS blockchains still work this way, such as Neblio and Navcoin.
One way to offer PoW-style security in a PoS network is to offer a masternode network, a kind of network on top of a validation network. While the normal staking hot nodes work away at block validation, the masternode network can be assigned other tasks and utility. The masternodes are generally getting their staking weight from a separate address in a separate wallet, and funds are sent to this address. This models the PoW system to some degree, as rewards are not sent to wallets that are colocated where the masternode work is being done. In Masternode blockchains, various disagreements between the masternode network and the staking network can arise. The disagreement between stakers and masternodes creates some instabilities in hybrid systems like DASH, PIVX, and even Divi. Other projects deployed solutions we were not satisfied with based on the drawbacks and remaining risks. Further, historically, granting masternodes utility has been futile, adding great complexity to the overall network, bogging it down, and preventing general improvement. Blockchain governance methods have typically been assigned to masternode networks, but even this has been superseded by modern smart contracts instead. So in the end, you have added complexity without any great benefit. Divi 1.0 followed this model, and Divi 2.0 continued it.
Divi 2.0 also introduced the new concept of staking vaults, and Divi 3.0 will be utilizing them to their full potential. Divi masternodes have never provided extra feature sets, and through thoughtful crafting of the validator model, new features have been developed that function within a normal Proof of Stake framework. Simplifying the core code leads to new features detailed in the following posts, such as subscriptions and escrow. Furthermore, Divi 4.0 will include unique side-chain functionality – a feature impossible to deliver with masternode code creating such a complicated and conflicting programming and operational landscape. Thus, the biggest thing to solve with Proof of Stake is the security model. Validator nodes and vaults rose to the forefront for this reason.
In this model, we can see we have returned to the security format where funds are not colocated to the validation node. Thus, the funds that comprise the staking weight for the validation node are not accessible even if the node itself is compromised. In the current model, rewards are sent to the same wallet that the staking funds are held. Thus the funding wallet can be completely offline, as secure as paper or a hardware wallet.
There are two main ways a Validator Vault can be implemented. The first is to pay for a vault management service. Divi Labs will be providing a vault service. You can fund a vault, which will be used as your staking weight in the network, and then shut down that computer completely, while being rest assured that your validation vault will keep functioning.
The second way to set up a vault is between two of your own computers. This will require some technical work but there are also resources for setting up your own vault manually, for free. You can use two computers or even two accounts on the same computer to do this. Or, if you wish, you can run a hot node as you have been able to on the desktop wallet since Divi 1.0, but this method doesn’t provide the security model of the validator vault and you must keep your machine running to provide network validation.
After reading this article, we hope you can see how validator vaults are a powerful way to help you provide network support for the Divi blockchain. Even better, they are drastic improvements over the masternode based network design that will allow dramatic improvements throughout the entire Divi Ecosystem.
This article is part of a series of articles regarding the migration to Divi 3.0. It will be executed in steps over several weeks, allowing for a seamless and efficient transition process. We urge you to pay close attention to the forthcoming updates, as they will contain vital instructions for the migration. There will be a gamification element incorporated, so we encourage you all to stay engaged! This should make the process more engaging and a rewarding experience for all node owners and the Divi family. You can find the introduction article as well as the list of articles of the series on this link.