The supremacy battle between Cardano (ADA) and Ethereum 2.0 has taken a new direction with the latest news of Stake Hound, one of the largest Ethereum stake pools, losing staked Eths worth millions of dollars to a ‘key management incident.’
According to a statement released on June 22nd, 2021, by StakeHound, the company said it’s unable to access 38,178 staked Ethereum. It happened on May 2nd, 2021, according to the StakeHound press release.
StakeHound has not taken the responsibility but has accused Fireblocks, its custody provider, of the negligence that has resulted in the loss of staked Ethereum (stETH) valued at $75 million (at the time of writing). In fact, StakeHound has already sued the Israeli-based company for alleged negligence in an Israeli High Court.
What really happened? According to StakeHound’s press release, errors on the parts Fireblocks caused the loss of 2 keys that are part of the 3-of-4 threshold signature for the shard forming the withdrawal key. As a result, stEths in the shard are inaccessible hence the loss of such a colossal investment.
According to StakeHound findings, Fireblocks committed several errors that caused this loss. First, they did not generate their private keys in a secure production environment. Second, they failed to include private keys that would be required to decrypt their 2 keys in the backup. Third, Fireblocks managed to lose both keys.
However, Fireblocks CEO Michael Shaulov refused to own up to the ‘Key Management Incident’ at StakeHound. According to the company, they only provide two services to StakeHound: custodial services and generating cryptographic passwords for the staking process to enable participant payout. So the lost keys problem does not fall within the services they offer.
What does this loss of keys mean to the affected investors? Losing private keys simply means that the wallet cannot be accessed unless the companies are able to decrypt the wallets. This basically means the investors whose coins are in inaccessible wallets are likely to lose their investment.
What Went Wrong? So many things went wrong between StakeHound and Fireblocks, but the problem stems from the Ethereum2.0 architecture. How comes Cardano has not had such problems, yet they are both use PoS protocols? Well, Ethereum architecture design did not anticipate such crypto staking problems as Cardano did.
Unlike Cardano, Ethereum 2.0 is a slashing-based protocol. But here is the problem- the network cannot slash crypto stakes because it has no way of moving funds out of participants’ wallets without signing with their private key. To slash staked crypto, you are required to send funds into the stake pool, which means a third party(s) will be controlling private keys, and the investor staking crypto loses his/her holding control.
In this case, StakeHound was to keep the keys, but it went ahead to hire Fireblock and Coincover, and all are third parties.
Cardano solved this problem right from the onset. From the academic research work and pear-reviews, such crypto staking problems were identified and got fixed by the Ouroboros protocol in a number of ways:
- Cardano protocol is not slash-based. Cardano does not slash participants’ stakes to keep the network secure. Instead, the network is built on honesty, where honest participants are rewarded. As longs as more than 51% of stakes are held by the honest participant, the network is safe. This eliminates the need to share private keys with third parties.
- You don’t need to send your staked cryptocurrency to a stake pool, where a third party handles your private keys. Instead, you can stake your holding while still in your wallet hence no sharing of private keys. Therefore, staking cryptocurrency on the Cardano network is simple and safer than staking Eth.
These are the major strengths that Cardano architecture has over Ethereum 2.0. The research and peer-reviews used in designing the architecture are now paying off. Maybe Staking Crypto is the front that will show how power Cardano.
Even if the companies manage to decrypt the inaccessible wallets, it will leave a big dent in the Ethereum 2.0 network. Investors’ trust and confidence will have plummeted already. So, what will happen to ADA value?
We are likely to see a stronger ADA as Eths drop in the next few days and weeks. This is because Eth, which is one of the biggest ADA competitors, will have fewer interested investors due to the current issues. This means today is the best time to buy Cardano.