Distributed Validator Technology: embedding security, transparency and integrity into enterprise blockchain design
In the same way the internet has revolutionised information sharing, blockchain has the potential to upend how we exchange and share value. A key difference between the two protocols concerns how they treat trust and transparency. With the internet, users are able to connect to anyone on the network to securely share information – the only people party to this information are those directly involved in the exchange.
With public blockchains, it is possible to connect with anyone on the network to share value. However, the transaction must be observed and validated by a quorum of network participants. If this consensus is not in place, it will mean that the core tenets of blockchain technology – decentralisation, transparency, trust and security – may be frustrated, if not lost altogether.
The entities responsible for validating transactions (i.e. maintaining ‘consensus’) connect to the blockchain via validator nodes. When a transaction is submitted to the blockchain, validators run a distributed consensus protocol, execute the transaction, and store the transaction and execution results on the blockchain. In this way, the validator nodes decide which transactions will be added to the blockchain and in which order – they are fundamental to the security, accuracy and reliability of distributed ledger networks.
Proof of Stake (PoS) and Proof of Work (PoW) are the most commonly used consensus mechanisms. The key difference between PoW and PoS concerns how they determine who validates a block of transactions. With PoW, the blockchain is secured by ‘miners’ who leverage sheer computational power to compete for the right to validate new transactions. With PoS, validators need to ‘stake’, or lock up for a set period of time, the native cryptocurrency of the blockchain (e.g. ETH in the case of Ethereum) to earn the right to confirm and update the blockchain. The network then selects a ‘winner’ based on the amount of crypto staked, who is then rewarded with a proportion of the transaction fees from the block they validate.
How the UDPN validates blockchain payments
Let’s consider how validation works in practice, with reference to the Universal Digital Payments Network (UDPN). The UDPN is a blockchain-based infrastructure that enables the transfer of stablecoins and central bank digital currencies (CBDCs) between participants and across borders, currencies and systems. The architectural premise of UDPN is a permissioned network of ‘on-chain’ validator nodes that are connected via an API to ‘off-chain’ business and transaction nodes. The matrix below sets out the different UDPN nodes and their distinct attributes.
|Node type||Node operator||Purpose|
|UDPN alliance members||On receipt of payment message, connects with relevant business nodes to validate payment signature and message origin. Stores a complete set of transaction data on the UDPN.|
|Transaction audit and reporting nodes||Regulators, auditors||Provide relevant transaction data to support the regulatory and reporting requirements of governments, central banks and other stakeholders. Store a complete set of transaction data on the UDPN.|
|OFF-CHAIN||Business nodes||Commercial enterprises||Enable business users to connect their IT systems to the UDPN and thereby access CBDC and stablecoin currency systems. Only the business user can view its own transaction history.|
|Transaction nodes||Regulated financial institutions – primarily commercial banks||Connect different stablecoin, CBDC systems and capital pools to the UDPN.
Transaction nodes are custom made for each currency, with the possibility of multiple nodes per currency to handle high transaction volumes. Transaction nodes necessarily have connectivity with the currency system. Nodes can only be operated by regulated financial institutions.
The diagram below, extracted from the recent UDPN whitepaper, illustrates the interactions between the various on-and–off-chain nodes in executing a digital currency transfer or swap.
As shown above, there are multiple validator nodes involved in each and every transaction, and more will be added as the UDPN grows. Importantly, not all validator nodes are required to participate in the same transaction, which would have a negative impact on transaction throughput (more on this below).
Rather, each transaction submitted from the business node is randomly assigned to a validator node. All transactions are then validated and written to the peer of the validator node, before being endorsed and added to the blockchain ledger.
The UDPN is a permissioned blockchain network. It is jointly managed and governed by UDPN alliance members (currently comprising the core group of founders with more to be added) and validator node owners, through a distributed governance framework. This means that not anyone can join the network as a validator. Prospective participants must be admitted by a majority vote among existing network members according to the procedures enshrined in the UDPN governance smart contract.
The situation is different in the case of permissionless networks such as Ethereum – where anyone can join the network and participate in validation. Ethereum’s shift to the Proof of Stake (PoS) consensus algorithm (i.e. ‘The Merge’) means that users are able to validate transactions if they stake some of their own ETH cryptocurrency into the Ethereum deposit smart contract. The user is rewarded for keeping their validator fully functioning and punished for failing to discharge their responsibilities, for example by having their ETH stake ‘slashed’.
No single points of failure
Increasing the number of validator nodes enhances permissioned and permissionless networks alike. Firstly, making the network more decentralised means that the network can better withstand hardware and software failures without going offline. Secondly, having more independently operated validators reduces the risk of a malicious actor, or coalition of actors, operating against the best interests of other network participants.
Onboarding more validators also compounds the network effect whereby the more people or devices that are connected to a network the more valuable that network becomes (as seen with social networks and online marketplaces such as eBay). Moreover, it motivates existing validators (who receive compensation by way of fees or cryptocurrency) into attracting sizeable and engaged user populations, in turn boosting the appeal and utility of the network in a virtuous cycle.
Each blockchain architecture has its own benefits and drawbacks. For example, many enterprise-grade systems tend to prioritise security over performance. Thus, when a blockchain network scales up or out, the network becomes more secure (for the reasons listed above), but performance slows down because more validator nodes are verifying the data being written to the ledger. Adding validator nodes to a decentralised network makes it more secure, but not necessarily faster. Therefore, it is important to gauge the point at which having more validator nodes starts to negatively affect performance. In the case of UDPN, this was 25 validator nodes – so the UDPN will only allow a maximum of 24 validator nodes in the future.
GFT is a validator of the SWIAT blockchain, with the remit to strengthen network reliability
In regulated industries such as financial services, there is a trend towards sourcing trusted, independently operated validators to run the validation processes. In this way, GFT recently formed an alliance with blockchain-based financial market infrastructure SWIAT (owned by DekaBank, Standard Chartered and Landesbank Baden-Württemberg [LBBW]), to run validator nodes for its digital assets network. The network enables users to issue, trade and settle all digital asset types (tokenised assets, crypto assets, digital registered bonds, tokenised securities) globally and in real-time. In this role, GFT ensures that incoming blockchain function calls are validated and correctly executed according to SWIAT’s rules and protocols. SWIAT estimates that the market for decentralised finance will be worth EUR 30 trillion in 2030, with a compound annual growth rate of 60%.
Validator nodes underpin the security of any blockchain network. As enterprise adoption of blockchain accelerates, particularly in financial services, network operators need to ensure that they have robust consensus mechanisms in place, and reliable partners who are able to (a) enhance the network effect through market reach and reputation, and (b) have the blockchain and digital process expertise to become trusted node validators. The more confidence users have in the network and network operators, the more users will flock to that network.
GFT has extensive experience building and managing networks built on distributed ledger technology. If any of the information is of interest to you, please reach out.