- Seven institutions control over 67% of staked Ethereum.
- Many are worried that one entity could end up controlling the process of validating.
September 15th, 2022, marked a significant milestone for the Ethereum ecosystem - the completion of its transition from the proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) one. This shift unlocked several features and benefits the network lacked under the previous setup.
While many crypto enthusiasts think Ethereum's transition from PoW to PoS was a giant leap toward a better network, it hasn't come without its challenges. According to a BanklessTimes.com analysis, that shift resulted in the concentration of staked ETH in a few entities. In fact, seven entities control over 67% of staked ETH, raising fears of PoS centralization.
Seven entities managing over two-thirds of Staked ETH should worry ETH's investors. With this centralization, the seven outfits wield a lot of power, and in the event of collusion, they could significantly impact the network. One major worry is that they could censor other users they don't agree with.BanklessTimes' CEO Jonathan Merry
As of September 16th, Etherscan reports that Lido and Coinbase manage a combined 45% of all staked ETH. Lido's total stake is 30.5% of the total, while Coinbase's is 14.6%. Kraken (8.62%) and Binance (6.68%) are the other two exchanges with significant shares of staked ETH.
Why the Shift to PoS?
Ethereum’s growing popularity led to increased congestion on the network necessitating the switch to PoS. PoW could no longer handle the load, resulting in high transaction fees and long wait times for transactions to be confirmed. PoS, on the other hand, is more scalable and efficient than PoW, making it better suited for a large-scale network like Ethereum's.
Under PoS, validators are chosen to create new blocks not based on how much computing power they have, as is the case with Proof-of-Work (PoW), but on how many coins they have deposited into a smart contract called a staking pool. This means that those who hold more coins have a greater chance of being selected to create a new block and earn rewards.
One issue with a centralized validation process is that it could lead to censorship. If a small number of entities control the validation process, they could choose to block certain transactions or even entire blocks from being added to the blockchain. Such actions would severely undermine the transparency and censorship resistance of Ethereum.
Another concern is that a centralized validation process could lead to collusion amongst validators. If a small number of entities are in control of validation, they could work together to game the system and reap greater rewards. This could have negative consequences for the security and stability of Ethereum.
Ethereum’s Answer to PoS Centralization
Ethereum has made provisions to mitigate possible centralization of the validation process. First, one would need a stake of 32 ETH (currently around $42,000) to become a validator. That's a pretty pricey sum to pay for someone with dubious intentions on the network.
Secondly, ETH's design enhances its resistance to tampering and fraud due to the threshold it sets for one to pull off such moves. First, you'd need to control 51% of the validating nodes to alter the blockchain transaction. Secondly, you'd require the control of an equal percentage of staked Funds. Attaining such minimums is practically impossible.
The network's slashing feature strongly deters bad acts. As violations result in validators losing half of their stakes, they will find it increasingly difficult to raise funds necessary to carry out their ill intentions. Consequently, the slashing feature provides a powerful incentive for validators to act in good faith and uphold their obligations to the network.
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