Has Proof of Stake Made Ethereum More Centralized?
The Ethereum network's switch to proof of stake has opened it up to criticisms of greater centralization and increased risk of censorship.
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Has the move to proof of stake made Ethereum more centralized and censorship-prone?
With its shift from proof of work to proof of stake last month, Ethereum now relies on validators, not miners, to add new transactions to the network. Those validators get to decide what transactions go into each block and in what order. Although that’s already lowered the energy consumption of the network by 99.99%, it also means that a large portion of the ETH securing the network sits with centralized entities.
That runs counter to all the reasons Ethereum was made to be decentralized in the first place, critics say. Blockchain networks aren't supposed to be at the whims of powerful, central entities.
As of last month, 13.5 million ETH (worth $22.3 billion at the time) had been staked on the Ethereum network, with more than 60% of that ETH sitting with Lido Finance, Coinbase, Kraken, and Binance. That means these centralized entities have a much higher likelihood of being assigned blocks of transactions to add to the chain—and may end up having an outsized say-so in what is and isn’t allowed on the network.
The numbers have shifted slightly since the network’s shift to proof of stake. There’s currently 14 million ETH (worth roughly $19.2 billion as of this writing) staked on Ethereum, according to blockchain analytics firm Nansen. And the distribution among centralized exchanges and Lido, which is managed by the Lido DAO, remains unchanged.
But the ETH centralization issue still gets more fraught because not all of the big, centralized validators have ruled out omitting transactions to stay compliant with Office of Foreign Asset Control (OFAC) sanctions.
For example, they could avoid processing funds being sent to or from Tornado Cash wallet addresses that have been sanctioned by OFAC. The whole issue is made more complex by the fact that Coinbase is currently funding a lawsuit against the U.S. Department of Treasury and OFAC to challenge its sanctioning of the Tornado Cash wallet addresses.
Caleb Sheridan, co-founder and product lead at Eden Network, told Decrypt he sees the centralization as a concern, but not a huge one.
He added that's there's enough ETH in circulation that isn't staked that other parties could, in theory, deposit more to outstake the centralized incumbents, thereby minimizing their control of the network. The 14 million ETH that is currently staked only represents about 12% of the 121 million supply, according to data from Ethereum block explorer Etherscan.
“I imagine we would see more [ETH] staked to counteract any behavior perceived as harmful to the network,” Sheridan said.
Eden Network runs one of several MEV-boost relays, a service that validators can use to outsource block production and maximize their revenue. It’s one of several companies to do so. Leading up to the merge, Figment, an Ethereum validator, announced that it would use the Flashbots MEV-boost to increase revenue.
The way Ethereum now works, each validator that adds a new block of data to the chain also gets to choose which transactions go into that block. So it’s possible that a validator could exclude certain transactions. It’s also the case that they could reorder transactions for the purposes of arbitrage or liquidation.
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