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Understanding Lit Protocol: A Comprehensive Overview

Jul 9, 2024 ⋅  13 min read

Key Insights

  • Lit Protocol is a key management and compute network that makes decentralized infrastructure and privacy tools easily accessible to application developers.
  • Projects already using Lit Protocol include Alchemy, Lens Protocol, DataverseOS, Collab.Land, Fox Corp, Humanity Protocol, Open Campus, and more.
  • Lit is currently in a Mainnet-Beta phase and plans to fully transition to mainnet and launch the LITKEY token in the second half of 2024.
  • Lit offers three core functionalities that enable builders to maximize privacy, user control, and autonomous code execution: decentralized access control, programmable digital signatures, and Wallet-as-a-Service (WaaS).
  • Lit’s decentralized key management and compute network has attracted over $15 million in investments from companies such as 1kx, Collab+Currency, Filecoin, and others.

Introduction

Crypto was founded on a core set of values embracing user sovereignty and independence from the threats of centralization. Bitcoin initially achieved this through distributed system design, applied cryptography, and clever economic incentives. Today, many teams have strayed from crypto ideals due to the difficulties of building user-friendly and scalable decentralized systems. Lit Protocol makes the original crypto/Web3 vision more attainable to builders by offering solutions that maximize privacy and user control.

At its core, Lit is a network of distributed nodes that manage decentralized keys and execute arbitrary compute while maintaining user privacy and user sovereignty. It is a system developers can use to build public protocols and applications for developer tooling, account abstraction, data marketplaces, embedded wallets (using Web2 logins), content authenticity/licensing, and more. Lit enables three core functionalities that make this diverse set of applications possible:

  • Encryption/decentralized access control
  • Programmable digital signatures
  • Infrastructure to build user wallets (WaaS)

Due to the interplay of these three concepts and its distributed network, applications built using Lit maintain a level of security and trustlessness currently unavailable in traditional key management and trusted custodial systems. Lit’s decentralized key management network has attracted over $15 million in investments from 1kx, Collab+Currency, Filecoin, and more.

Technology

Lit uses advanced cryptography, trusted execution environments (TEEs), and peer-to-peer networking to operate a decentralized key management network that enables developers to add decentralized functionalities to their protocols and applications. The technical concepts that underpin Lit’s network make it a robust product for developers focused on building secure, decentralized, and user-centric crypto projects.

Core Utility

Access Control

With access controls, content is encrypted and hosted on an open venue while being made accessible only to users who meet certain criteria. Privacy is enforced through identity-based encryption, where access to data is only granted to those who meet Access Control Conditions (ACCs) defined by the developer or user (depending on the implementation of Lit Protocol).

In this process, the initial user encrypts content on their device and specifies the ACCs others must meet to access the encrypted content. The Lit network manages the decryption key. At least two-thirds of the network’s nodes must reach consensus and the end user must meet the ACCs before the nodes provision the user’s key share to decrypt and access the content.

ACCs can involve onchain or offchain requirements and can act as decryption barriers unless users meet specific conditions. For example, they can gatekeep certain data based on token ownership, DAO membership, or any data on the web. Potential use cases include personal data and identity management, data encryption, and credential-gated experiences/content.

Programmable Digital Signatures

Programmable digital signatures are used to automate transaction signatures when certain specified conditions are met. They are conducted through distributed key pairs generated by multi-party computation. These key pairs are called Programmable Key Pairs (PKPs) and function as user wallets, backend signers, or other signature-based mechanisms. Similar to signing decryption keys for Access Controls, PKPs require at least two-thirds of Lit nodes to achieve consensus before signing wallet or other actions. The signing logic (conditions) dictating PKP signatures are specified through Lit Actions, which are JavaScript programs stored on IPFS. All Lit nodes contain a JavaScript execution environment that enables them to execute arbitrary JavaScript code. Use cases for programmable digital signatures include conditional execution based on event listening, chain abstraction, the authentication of AI-generated content, trusted setups for zkSNARK systems, PKPs as orchestrator wallets for cross-chain communication, and more.

User Wallets (WaaS)

Programmable key pairs also enable developers to build user wallets, among other useful applications. These wallets will be imperative in abstracting the technical barriers that dominate the current wallet management process. As it stands, the process is either too complicated for the non-native crypto user or defaults to centralized custody. Using Lit PKPs to build a wallet, developers can avoid seed phrases altogether, enable Web2-style authentication (text, MFA, etc.), and build backup/recovery mechanisms.

Lit Architecture

Chronicle

Chronicle is an EVM-compatible rollup, launched as an Arbitrum Orbit chain, that settles on Ethereum. Though Lit is not a blockchain, it uses this rollup primarily to coordinate its node set, manage permissions for PKPs, and act as a persistent layer for shared state among nodes. Once LITKEY launches, Lit nodes will stake the token to determine their inclusion in the active validator set, which is refreshed every epoch. PKPs are represented as ERC-721 tokens (NFTs) on Chronicle. The permissions associated with PKPs are also onchain and used to verify signature requests by end users.

Chronicle is also used for metering usage and can support unique signature verification schemes that Ethereum’s EVM cannot. Users load LITKEY tokens into a contract, and their balance is deducted as they use the Lit network. Regarding signature verification support, Boneh–Lynn–Shacham (BLS) aggregation signatures can be verified onchain, lowering verification costs.

Chronicle adds an additional security assumption to Lit at the rollup sequencing layer. Currently, the Chronicle sequencer is centrally operated by Conduit, the rollup deployer team. However, Lit requires Lit nodes to also run Chronicle nodes to maintain high performance when syncing onchain and offchain operations. At the same time, Chronicle also benefits through the added redundancy and sequencer accountability. Because Lit nodes run a replicate of the chain, Lit nodes would know and immediately reject any invalid state transitions if Conduit were to act maliciously.

Lit Nodes

Each Lit node operates a sealed encrypted virtual machine. The term "sealed" implies that neither the operator, data center owner, nor any other party can access the interior of the processor. Each node includes a JavaScript execution environment and holds key shares. These nodes collectively form the Lit Network, which ensures data authenticity by requiring nodes to verify the seal of their peers through cryptographic proofs. This process ensures that all nodes in the network are genuine, sealed, and encrypted virtual machines.

The Lit Network operates using a distributed key management system where each node holds independent key shares of threshold key pairs. These threshold keys are created through distributed key generation. To perform operations with these keys, such as signing requests, at least two-thirds of the network nodes must participate. Each node must compute an authorization within its sealed environment, ensuring that no single node can compromise the system, thus maintaining a high level of security and trust within the network.

Sealed Virtualization

Lit ensures data and compute are kept secure and private through hardware-level isolation from individual Lit nodes. This is achieved through Secure Encrypted Virtualization with Secure Nested Paging (SEV-SNP), a security feature AMD created to provide encryption for virtual machines (VMs). The feature ensures that the data within a VM remains protected and confidential, even if the underlying physical host or hypervisor is compromised. A hypervisor is software that allows multiple VMs to share the physical resources of a host machine (such as CPU, memory, storage, and network interfaces) while maintaining isolation between them. With SEV-SNP, each VM has its own unique encryption key, managed by a secure processor within the CPU. This setup makes it impossible for unauthorized users of other VMs or the hypervisor to access the encrypted data. SEV-SNP further enhances this security through hardware-based memory for each VM on a server. This hardware encryption ensures VMs are isolated from one another and from the host, protecting data and apps running within.

Staking Mechanism

To run a Lit node and receive staking rewards, node operators must stake LITKEY (Lit Protocol’s native token) over a predetermined time commitment for which their assets will be locked. The combination of stake amount and timelock determines the operator’s total rewards rate. Currently, Lit is running with a permissioned set of 10 node operators. This validator set will be used in Lit’s initial mainnet. Later, the following validator set selection mechanism will be used: The top 30 nodes ranked by stake weight are included in the active validator set, while the rest of the staked nodes are kept as reserves. Active validator nodes cannot be replaced if their stake weight falls or reserve nodes increase; they must choose to leave or be slashed.

Operators can start unfreezing their stake at any time; however, they will still need to wait their committed time before they can withdraw all of their funds. Nodes with timelocks below three months are ineligible for rewards and are automatically removed from the active validator set.

Slashing

Nodes can be slashed when more than two-thirds of the other nodes in the active validator set report them to be offline or acting maliciously. After this, they can challenge the decision. If successful, they lose no funds and can be returned to the active set for the next epoch, given they have enough stake weight to remain in the top 30 nodes. If unsuccessful, they lose 5% of their total stake and are moved to the reserve set.

Rewards

Lit’s rewards system is split between node operator and staker rewards, with a budget based on a (currently undetermined) multiple of node operation costs. Each node has a maximum profit margin of 5x the operation cost and a minimum profit margin of 10% of the operation costs. Individual profits can be negatively influenced by a variety of factors, including:

  • Suspended/Jailed status - Node is prevented from earning rewards, and profits are distributed among other nodes
  • Node operator stake is below the minimum threshold requirement

Lit maintains a reward budget for each epoch. The combined staking rewards are typically expected to be less than the total budget allocated for a particular epoch, as the rewards are distributed based on the stake-weight distribution among nodes. If the stake-weight distribution is equal, meaning all nodes have staked similar amounts, the rewards will be more evenly distributed, and the combined rewards will approach the epoch budget.

If one node has a significantly higher stake weight than others, it will receive a disproportionately larger share of the rewards. However, this can lead to inefficiencies in the reward distribution system. As a result, the total combined profits or rewards for the entire network are aimed to be less than the epoch budget. In any case, the total amount of rewards that a single node is eligible to receive is capped. This acts as a balancing mechanism to discourage extreme centralization of staked tokens.

Cryptography: MPC and TSS

Multi-party computation enables trustless functioning between multiple parties while also maintaining secrecy over the private key since no individual party can obtain information for the whole key. Multi-party computation (MPC) and threshold signature schemes (TSS) enable the distribution of a private key among several participants as shares instead of a single entity, which can then be combined offchain to collectively produce a digital signature identical to a conventional one.

Key Resharing/Epoch Changeovers

Private key shares are occasionally refreshed, rotating share ownership among nodes in the network. This ensures private key integrity by minimizing the security risk and simultaneously enabling participant changes within the network, increasing network adaptability within these refreshes. Each new epoch can result from these refreshes, a key generation, or a recovery event. Each epoch must lock in a set of validators (nodes) by a deadline, or it can be rolled back. If an epoch changeover is successful, the node replaces the old DKG with a new one.

Tokenomics

As of June 2024, the LITKEY token is not live. The current testnet token is used to pay for Lit services and gas on the Chronicle testnet rollup. Scheduled for later this year, Lit’s V1 Mainnet launch is scheduled to include LITKEY’s official release.

LITKEY will have a maximum supply of 1 billion, bucketed into five separate token allocations. The project team is still determining vesting schedules.

  • Team – 285 million LITKEY (28.5%)
    • Lit core development team.
  • Community – 250 million LITKEY (25%)
    • Grants for software development, both on the core protocol and supporting OSS tooling. (Heavier focus on developers building on Lit.)
  • Investors – 158.3 million LITKEY (15.83%)
    • Investors included a seed and Series A round, which raised a total of $15.3 million.
  • Node Operator Rewards – 150 million LITKEY (15%)
    • Rewards for Lit nodes.
  • Association Treasury – 150 million LITKEY (15%)
    • Grants focused on promoting the sustainability and utility of the network. Heavier focus on building and marketing the infrastructure over time.

LITKEY tokens will be used for gas on Chronicle, for staking by node operators to determine the validator set, and for protocol governance. Its use in protocol governance will be limited at mainnet launch, with a council selected by the Lit Association in charge of decision-making.

Users will also be able to delegate their tokens to specific node operators to earn a portion of the network’s revenue. Specifically, after staking their tokens into the stake vault and time-locking them (the same mechanism as with node operators), users can delegate their stake to node operators, earning rewards minus commission. More use cases are still being conceptualized.

Network Activity / Protocol Usage

As of June 2024, 86 listed projects were built using Lit, and over 2.2 million transactions, 275,000 accounts, and 296,000 PKPs have been minted/processed on the Chronicle rollup. In the future, some metrics that could be used to analyze Lit’s growth effectively include the following:

  1. User Count (PKPs Minted Growth Statistics)
    1. A core metric that tracks usage and activity.
  2. Developer Growth
    1. Looks at developer usage and onboarding rates can help assess Lit’s mainstream adoption and popularity.
  3. App Creation (WoW, MoM, QoQ)
    1. Measures app and project creation rates and can measure developer engagement and support of the protocol.
    2. Looks at how many ecosystems Lit is integrated into. It can also help measure scalability and mainstream Web3 adoption.
  4. TVL in Lit Accounts
    1. Measures the USD value of assets held in accounts controlled by Lit keys.

Roadmap

Lit plans to fully launch its mainnet this year. Below are a few updates and ongoing roadmap items.

  • In May 2024, Lit released the V0.1 update with improvements to existing systems, including session-based authentication and allowing signing and encryption/decryption entirely within trusted execution environments.
  • New functionality was introduced to Lit Actions in May 2024, enabling signing and decrypting within Lit Actions on the testnet.
  • Lit contributed to the HackFS hackathon in 2024 hosted by ETHGlobal, offering $10,000 in prize money split between the “Best Use of Sign/Decrypt Within a Lit Action” and a participation prize. A private AI Bot won the first-place prize, developing an AI-supported, secure wallet. Synthetic Senators won second, creating AI agents that can vote on DAO governance policies on behalf of a user.
  • In June 2024, Lit released Domain Wallets, an open standard for Web3 identity that replaces addresses with domain names, enabling seamless logins using existing crypto domains.
    • As per CAIP-275 (Chain Agnostic Improvement Proposal), Lit is building domain wallet authentication to unify credentials with Web2 authentication methods.
  • Later this year, Lit will launch its v1 mainnet. Included in this release will be several performance improvements, scaling considerations, support for new signing curves, a new payments model, and the Lit Protocol token, LITKEY.

Closing Summary

Lit is shifting the paradigm for application development on the decentralized Web. By providing identity-based encryption, Lit enables developers to build crypto applications that are provably private, while Lit’s programmable digital signatures and wallets enable highly abstracted asset-management design and high degrees of automation in new applications. These capabilities are facilitated through a decentralized, confidential, and cryptographically secure network. As Lit becomes more adopted among developers, building useful and accessible crypto applications will start setting the standard for the crypto industry.

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Onchain Jíbaro. Background: Photography, Quantitative Banking, & Manual Labor.

Matt Zhang

Matt is a student at NYU studying finance and math. He likes reading up on Layer-1s, DeFi, and thinking of new ways to bridge Web2 x Web3.

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About the authors

Onchain Jíbaro. Background: Photography, Quantitative Banking, & Manual Labor.

Matt is a student at NYU studying finance and math. He likes reading up on Layer-1s, DeFi, and thinking of new ways to bridge Web2 x Web3.