Ethereum Centralization Increases Post Proof-of-Stake Merge
During Ethereum’s long-awaited Merge on Thursday, more than 40% of the network’s blocks were added by two entities: Lido and Coinbase.
Originally intended by developers to avoid centralization, the merge from proof-of-work (PoW) to proof-of-stake (PoS) on the second largest blockchain has increased the difficulty for individual entities to tamper with the Ethereum ledger. However, early signs of network consolidation have shown this is not the case.
“Out of the last 1,000 blocks, 420 have been built by just Lido and Coinbase,” Martin Köppelmann, co-founder of Gnosis, an Ethereum infrastructure firm, wrote in a tweet.
In his thread, Köppelmann mentioned that just seven players own more than two-thirds of the stake on Ethereum’s proof-of-stake network — the key measure of network power under the new miner-free system.
Lido, a kind of community-led staking collective, and Coinbase, the world’s third-largest crypto exchange, own 27.5% and 14.5% of the network’s stake, respectively.
Ethereum’s long-awaited Merge to PoS was successfully completed at 6:42 UTC on Thursday morning. The new system invites so-called validators to stake 32 ETH with the platform, granting them ability to write and confirm transactions to the Ethereum ledger.
That high capital requirement ($50,000 at press time), along with the technical difficulty of setting up a validator system, means that only a few people are able to become validators on their own.
As a result, ETH has flowed to services offered by Coinbase, Lido, and other staking pools that allow users to become validators — and earn rewards for doing so — without much of a hassle.
So much money going to so few services has sparked concerns: If a single entity controls more than 66% of the network’s staked ether, it will be able to make it more difficult for others to write transactions to Ethereum’s ledger.
Fears of validator centralization became more prescient last month, after U.S. government sanctions raised questions around whether validators might be forced to censor transactions coming from certain blockchain addresses. Some, though not all, U.S.-based validators have announced that they will begin to ignore transactions from the sanctioned Tornado Crash mixer program, meaning it might be more difficult for those transactions to make it onto Ethereum’s decentralized ledger.
“This is consolidation and consolidation = centralization. And that is very dangerous. Why? Because exchanges are under government control. Without question the Ethereum blockchain is now subject to ‘transaction censorship’,” said Chris Terry, an executive at SmartFi, a crypto lending platform.
Fears of centralization have led some to compare ETH under PoS to precisely the sorts of centralized fiat currencies that blockchains sought to circumvent.
“ETH is now exclusively created digitally by set parameters under the control of its central planners,” Max Gagliardi, co-founder of Ancova, wrote in a tweet.