The decentralization of the Ethereum network has continued to erode since the transition to Proof of Stake. Vitalik Buterin suggests making things worse…
Ethereum and the Lido problem
Ethereum’s decentralization relies on a mechanism known as Proof of Stake (PoS), as opposed to bitcoin’s Proof-of-Work mechanism.
The concept of “Staking” is at the heart of this PoS mechanism. Staking consists of locking ETH to become a node in the network and validate transactions. Nodes are rewarded with newly minted ETH.
Unfortunately, it takes 32 ETH ($121,000)… This is where the main threat to Ethereum’s decentralization lies. This sum being prohibitive, services allowing these 32 ETH to be pooled have emerged.
As a result, the Lido company now hosts 33% of all ETH contributed in staking. This concentration raises questions about Ethereum’s decentralization.
The largest holders of LDO (the governance token of the Lido DAO) are Lido (15%), Paradigm Capital (7%) or even Binance.
“Lido’s dominance erodes Ethereum’s decentralization, which in turn devalues Ethereum itself”, estimated Kevin Weaver, an engineer at Metropolis.
Knowing that DAO members generally delegate votes to the largest holders. And how could it be otherwise given the constant increase in the complexity of Ethereum?
A single actor controlling 33% of the nodes significantly increases the probability of a devastating hard fork which will sooner or later emerge from a disagreement over the rate of issuance of ETH.
How many ETH at most?…
There will never be more than 21 million bitcoins. This is the promise that does not exist on Ethereum.
In September 2021, the London hard fork introduced EIP-1559. Since then, part of the transaction fees have been burned, reducing the number of existing ETH. This reduction in the money supply is, however, more or less offset by the rewards linked to staking.
In other words, the number of ETH increases when the quantity of ETH burned in gas fees becomes less than the quantity of ETH distributed in the form of rewards paid to nodes.
However, the number of transactions is on the hindsight since 2021. If the quantity of ETH in circulation were to increase significantly, it is written in advance that stakers will change the protocol again to prevent the devaluation of their ETH.
The centralization of Ethereum will make things much easier. Especially since more than 85% of ETH is held by entities owning 100 ETH or more. Around 30% of ETH is in the hands of entities with more than 100,000 ETH ($380,000).
What could be more normal when we know that 70% of ETH was pre-mined, distributed for free to the founders or sold for $0.3 each. Here is our article Bitcoin vs. Ethereum on this subject.
And given that with the PoS mechanism, it is the rich who decide, there is cause for concern. Especially since decentralization could soon get even worse.
Vitalik’s new proposal
High priest Vitalik Buterin has just proposed raising the minimum amount for an Ethereum node. From 32 ETH to 4,096 ETH! Another proposal: limit the total number of nodes to 4,096.
However, it is obvious that the more budget required to validate transactions, the more centralized (and therefore less secure) the network becomes.
As told @GrassFedBitcoin :
“Why isn’t bitcoin a shitcoin?”
-Ability to manage a node.
-The ease of installation.
-A culture that encourages people to own their own node.
-The fact that many people have a knot. »
There are other factors such as “immaculate conception” (no bitcoin was pre-mined) or first-mover advantage (although bitcoin wasn’t really first). But this is nothing compared to the importance of the decentralization of the protocol.
The fewer nodes there are, the greater the probability of network capture. Especially since, in the case of Ethereum, changing the rules of monetary issuance has already become a habit.
This is why we must not accept that Bitcoin blocks can be filled with ordinals and other ponzi-backed spam. It is laughable to invoke the security budget for minors. The latter cannot increase at the expense of decentralization.
Blocks full of ordinals and STAMPS increase the cost of a node due to the memory required. Not to mention the time required to install a node which now varies between two days and three weeks.
Don’t miss our article on the criticisms that are coming against the developers of Bitcoin Core.
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