Distributed Validator Technology: embedding security, transparency and integrity

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, storing 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.

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.