Redefining Network Security: How Privacy Innovations Are Shaping The Blockchain

Ethereum’s shift to a proof-of-stake (PoS) consensus framework a few years ago transformed how the network is secured and rewarded fundamentally, thereby giving birth to the idea of liquid staking — which, as the name sort of suggests, allows users to stake their ETH in lieu of tangible yields all while keeping their assets liquid. 

Normally, staking on Ethereum requires locking up 32 ETH per validator, which many users cannot afford. However, platforms like Lido and Rocket Pool pool user deposits, subsequently staking them on Ethereum’s consensus layer and issuing liquid staking tokens (LSTs) representing the staked ETH plus accrued rewards. 

The more ETH staked, the harder it becomes for any malicious actor to accumulate enough stake to attack the network. Lido’s rise, for example, correlates with a significant increase in total staked ETH following Ethereum’s merge and Shanghai upgrade (with Lido alone responsible for roughly one-third of all validators).

Moreover, some protocols also distribute user deposits across many underlying validators, reducing the impact if any single validator misbehaves. In theory, this diversity can reduce slashing risks (penalties for validator downtime or misconduct) for a staker versus putting all of their funds in the hands of one validator. 

The risks need to be understood as well

The above-mentioned innovations come with risks and vulnerabilities, as users of liquid staking are required to trust the protocol’s smart contracts and delegation mechanisms. To mitigate this, protocols need to undergo extensive audits and have bug bounty programs.

Another concern is the depegging of LSTs. In principle, these tokens are each meant to be worth roughly 1 ETH (plus any embedded yield) when withdrawals are functioning normally. But market prices for these tokens can diverge from ETH under stress. For instance, during past crypto market turmoil, such as the 2022 liquidity crises, stETH (Lido issued ETH) traded at a significant discount to ETH as large holders rushed for liquidity. 

Such a depeg can hurt holders who need to sell quickly, and it introduces instability in DeFi protocols that treat these tokens as near-equals to ETH. Lido’s documentation itself acknowledges that if arbitrage is impaired (for example, due to withdrawal restrictions or market panic), the exchange price of stETH stands to drop below its inherent value. 

That said, by far the most discussed risk of liquid staking is centralization, specifically since a few staking providers can control a disproportionate chunk of Ethereum’s validators. And, if these entities decide to collude with one another, they can potentially censor transactions or disrupt the chain.

This is where Aleo enters the fray, as it takes a fundamentally different approach to network operations and staking, primarily by making privacy and zero-knowledge cryptography cental to its design. In contrast to Ethereum’s fully transparent ledger, Aleo enables secure blockchain applications and staking without exposing sensitive data on-chain. 

Upon launch, the project garnered significant attention not just from developers excited to build private applications, but also from the wider market as its native token, $ALEO token was immediately listed on major exchanges like Coinbase following its mainnet debut. 

What sets Aleo apart is its vertically integrated zero-knowledge architecture wherein its entire stack, from its programming language (called Leo) to the execution environment and consensus it operates under, is purpose-built to enable privacy. Transactions and smart contract executions on Aleo are not broadcast instead, most of the heavy computation happens off-chain in a way that produces a succinct zero-knowledge proof (ZKP). 

This proof is then verified on-chain by Aleo’s network of validators using a bespoke consensus which blends a Proof-of-Work (PoW) element for generating ZKPs with a fast finality AleoBFT protocol (allowing validators to confirm blocks based on cryptographic proofs of valid computation, rather than seeing the raw transaction data).

From a staking perspective, it is worth noting that while Aleo still relies on validators to secure the network, the nature of these duties differs from Ethereum’s. For instance, Aleo’s validators must verify ZKPs and agree on the state, maintaining consensus while preserving user confidentiality. 

This means the platform can offer what it calls “programmable privacy,” wherein the network can enforce correctness and security just like Ethereum, yet it doesn’t force every user’s activity into public view. For example, if one were to use an Aleo-based DeFi app, outsiders would not necessarily see the details of those transactions, even though the network can prove they are valid. 

Balancing transparency and privacy in this manner is Aleo’s core innovation. 

A future to look forward to

The implications of Aleo’s novel operational setup, especially for staking and network security, stand to be significant as it does not see privacy as being at odds with transparency with critical network parameters (like the total amount staked, or the state of the consensus) remaining transparent and auditable, but user-level actions being shielded. 

This approach has not only piqued the interest of crypto enthusiasts but also players like Google Cloud, which announced it would be running an Aleo validator node to help secure the network and to explore enterprise use cases for private on-chain transactions. Lastly, with its mainnet now live and an ecosystem of projects already building (over 350 applications were developed during testnets), Aleo is positioned perfectly to capitalize on Web3's growing emphasis on user sovereignty over their data.