Who Controls Your Funds in Non-Custodial Ethereum Staking?

The concept of non-custodial staking has become increasingly popular in the Ethereum ecosystem, but it's essential to understand who controls your funds after staking.

When you stake 32 ETH into a validator, it may seem like that money is still 'yours,' but the underlying logic of staking reveals a more complex design. The Ethereum protocol splits permissions into two distinct parts at the consensus layer: the Signing Key and the Withdrawal Credentials.

The Signing Key is used for 'work' and must be directly connected to a server at all times, while the Withdrawal Credential represents control over withdrawal rights, which can lie peacefully in your cold wallet or mnemonic phrase. This means that a third party can fully operate a validator on behalf of the user without needing to possess the user's ETH.

Liquid staking solutions like Lido aggregate large amounts of users' ETH and distribute them via the protocol to various Node Operators who create and operate validators, but this changes the underlying control structure of ETH. The withdrawal credentials for these validators are not each stETH user's own Ethereum address.