Ethereum’s transition to PoS was highlighted as a significant upgrade. But one month after the move, concerns about centralization are growing.
Ethereum went through a significant network upgrade on September 15, moving from a proof-of-work (PoW) mining consensus to a proof-of-stake (PoS) consensus. Key update is called Merge.
The merger is planned as a breaking change for the Ethereum network that will make it more energy efficient, providing subsequent improvements in scalability and decentralization.
However, after just over a month, some industry observers fear that the move to PoS is pushing Ethereum towards more centralization and tighter regulatory oversight.
The merger changed the way transactions are verified on the Ethereum network. Instead of miners investing their processing power to validate a migration, validators now promise ether.
Tokens to validate these transactions. The problem with this system is that validators with more ether have more voting power given that they have a larger percentage of validator nodes or ETH.
To become a validator on the Ethereum network, you need to deposit at least 32 ETH. Therefore, whales and major crypto exchanges have staked millions of ETH to get most of the verification nodes.
The current staking activity appears to be highly centralized as leading liquid staking protocol Lido and leading centralized exchanges such as Coinbase, Kraken and Binance account for more than 60% of ETH staked.
R. A. Wilson, CTO of cryptocurrency and carbon credit exchange 1GCX, told Cointelegraph that the merger allows large Ether holders to gain greater control over the network, making the network significantly more centralized and certainly less secure. and said:
“Many ETH holders list their cryptocurrency on centralized exchanges like Coinbase, allowing these platforms to become dominant holders of the network, helping to centralize stakeholders.”
The direction of centralization was pretty obvious right after the merger, as 46.15% of the nodes could only be attributed to two addresses to store data, process transactions and add new blockchain blocks.
Arcane Crypto analyst Vetle Lunde told Cointelegraph that while the move to PoS is important to Ethereum’s long-term energy efficiency and scalability goals, there are tradeoffs to be aware of:
“The biggest validators, which are exchanges, represent a potential long-term risk. Exchanges have already found themselves in a complex regulatory environment, and precautionary denial of transactions can go against an important core principle of crypto ethics – censorship resistance.
While Ethereum proponents claim that anyone with 32 ETH can be a validator, it is important to note that 32 ETH, or about $41,416, is not a small amount for a beginner or regular trader, in addition to the fact that the blocking time is quite long. long.
Slava Demchuk, CEO of complaints platform Web3 PureFi, told Cointelegraph that centralization and staking complexity will make centralized entities like Coinbase stronger:
“Most people will bet with custodians (like Coinbase) because of its simplicity and lack of 32ETH. In this way, large companies will get a large portion of the network, making it more centralized. This means that organizations with more ETH will have more control.”
Fear of regulatory scrutiny
In early 2018, the SEC stated that Ethereum is not a security due to its decentralized development and expansion over time. But that could change with the move to PoS, which complicates the relationship between the Ethereum blockchain and regulators.
Gary Gensler, chairman of the U.S. Securities and Exchange Commission (SEC), testified before the Senate Banking Committee on merger day, saying the proceeds from the “expectation of profiting from the efforts of others” would include evidence: the assets of a digital stock.
Gensler also mentioned that buying shares on major centralized exchanges looks “very similar” to lending, highlighting the high-yielding products that caused the recent crypto market crash and pairing those products with financial instruments reviewed by the SEC.
Additionally, in an SEC lawsuit filed just a week after the merger, the SEC claimed jurisdiction over the Ethereum network as most of the nodes are concentrated in the United States.
While the SEC’s statements have caused confusion and many criticize the regulator for its approach, some believe Ethereum foresaw this, as Gensler has already stated that the move to PoS could trigger securities laws. Ruadhan, the lead developer of Seasonal Tokens, developer of PoW-based mining tokens, said C.