The future of Ethereum is under huge doubt owing to the increasing centralization of the network. Despite being one of the foremost blockchain networks in the decentralized finance space, Ethereum has been under the control of a handful of stakers.
By that, the integrity of the network among enthusiasts and developers alike is under stern question. According to DeFiLlama, Ethereum has more than $51.24 billion Total Value Locked (TVL), with Solana holding $7.91 billion being the closest.
This figure underlines the vast relevance of Ethereum as a major network in the DeFi landscape. However, the growing limited concentration of control within the network to few validators has raised questions if Ethereum is becoming too centralized.
How did Ethereum arrive at this stage?
Questions about the increasing centralization of Ethereum began to take shape following the transition of the blockchain from the Proof-of-Work to the Proof-of-Stake consensus mechanism in September 2022. Through the Merge, Ethereum abandoned its old consensus model to increase its efficiency and enhance transaction completion time.
Also, the innovation positioned the layer 1 blockchain on the path of becoming more eco-friendly as the PoW is known for its notorious consumption of energy. More so, it changed completely how transactions and blocks are produced, shifting away from the intensive computation of the PoW. Therefore, allowing validators to stake their ETH, validate transactions, and further support the security of the network.
While posing several upsides, PoS systems are leaning heavily towards centralization as they reward validators based on the size of their stake. By that, validators with huge holdings are in good position to validate transactions and create new blocks most times.
Conversely, the model supports big-bankroll validators to gather more rewards and validation strength, much to the advantage of participants with small stakes. In addition, it permits a few wealthy validators to control more power, leading to the centralization of the network.
In 2023, JPMorgan warned that the Merge and Shanghai updates had pushed Ethereum towards centralization, posing serious threats to its decentralized ethos. The firm stated that leaving the network under the control of a few liquidity providers and node operators could expose it to attacks or collisions.
In the report, the financial institution emphasized that participants with large stakes can form oligopolies, marginalizing smaller stakers much to the disadvantage of the community. Participants like Lido, Binance, Coinbase, Kiln, and Figment control a significant portion of staked ETH on Ethereum, further increasing questions about the centralization of the network.
Solution
Ethereum co-founder, Vitalik Buterin hasn’t remained silent on the issue most especially after the network completed the transition to the PoS mechanism. The expert admitted the increasing centralization of the blockchain while warning that it is a serious threat to its core principles.
In reaction, the Ethereum co-founder suggested some implementations to preserve the decentralization of the network and resistance to censorship. One of the key changes Buterin proposed is simplifying node operation. He suggested that there should be a reduction to the technical and financial bottlenecks to managing a node to allow more entities participate in ensuring the decentralization of Ethereum.
Similarly, he added that another way to combat the rising centralization is to introduce more staking options. According to him, simplifying staking options will allow more distribution of power among participants.
Buterin in his suggestion called for the introduction of inclusion lists to address block production centralization. The co-founder said the list will encourage the inclusion of some key transactions in the blocks, limiting the control of validators.
Additionally, he called for protocol improvements to further enhance decentralization. Some of the reforms include refining the current consensus mechanism and introducing more innovative ways to prioritize decentralization without affecting Ethereum’s scalability and security.
Conclusion
It is important to establish that Ethereum still remains one of the most decentralized blockchains around, but the growing threat of losing the posture is becoming alarming. Issues like centralized staking, censorship concerns, cloud reliance among many others pose serious threats to the decentralization of the network.
Thanks to the proactiveness of Vitalik Buterin and the Ethereum community, most of these issues have been identified and there are ongoing reforms to address some of them. So far, suggestions have pointed to key proposals like decentralized staking, advocating inclusion lists, and protocol-level reforms to ensure that Ethereum maintains its decentralized nature.
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