With ‘The Merge’ approaching, turning Ethereum into a fully PoS validated blockchain; the threat of centralization in Ethereum 2.0 is real and worries even Vitalik Buterin.

Possible centralization in Ethereum 2.0

One of the biggest criticisms regarding the upcoming upgrade to the Ethereum network, dubbed “The Merge”, which will merge the main blockchain – currently in proof of work (PoW) – with the Beacon Chain (validated by Proof of Stake – PoS), is about the possibility of centralization on Ethereum 2.0 with the concentration of stake in a few validators.

This threat exists since, in theory, all a malicious entity needs to attack the network consensus is to deposit enough ETH to get more than 50% of the total Ether staking by the nodes validators.

To become a validator, node needs to do staking of at least 32 ETH – which at the current price is equivalent to about $32,000but during Ethereum’s historic high it would be something around $160,000.

Even in the possible “price bottom” against the dollar, it is easy to see that they are few people who have $32,000 available to be locked into stakingrunning out of liquidity for a pre-defined period of time/blocks.

Furthermore, the more ETH is deposited, the greater the weight of votes when validating transactions. understand more about decentralization.

Know more: Understand what decentralization is once and for all

Consensus centering and nakamoto coefficient

By having such a big limitation on the “stake” of the nodes that can validate the network, it is normal that many investors join staking pools or staking platforms for concentrate enough ETHbecome a validator and participate in the block reward from inflation on Ethereum 2.0 – or the current Beacon Chain.

In the graph below, we observe this phenomenon, with 42.3% of the ETH deposited are of staking poolswhich work more or less like a mining pool.

Pie chart of largest depositors by category: 42.3% staking pools, 31.7% others, 17.7% exchanges, 8.31% whales.
Ethereum: Largest depositors by category” – Source: EtherScan – Beacon Chain

17.7% are from exchanges, which work more or less under the same logic, when making the “staking” tool available to their customers. Only 8.31% are from addresses of large investors (whales) and the rest of other categories.

When analyzing by unique addresses, we see that four entities have more than 55% of all ETH deposited in proof of stake: Read (31.8%), Kraken (8.56%), whales (8.07%) and Binance (6.81%).

Centralization on Ethereum 2.0 through Lido with 31.8% and other nodes with 31.6%.
Ethereum: Largest depositors by address” – Source: EtherScan – Beacon Chain

By understanding that “Whales” can involve more than one different entity, we can conclude that the Nakamoto’s Coefficient (NC) of Ethereum 2.0 is greater than four (NC > 4).

So it’s still bad in terms of consensus centralization, but as a comparative measure, it manages to be better than the Bitcoin (BTC), whose NC = 4but at times it equals three (3).

Pie chart showing pools with the most hashrate in Bitcoin.  Foundry USA 20.1%, F2Pool 15%, AntPool 14.2%, Binance Pool 12.7% and others.
Bitcoin: Distribution of mining pools” – Source: BTC.com/stats/pool

As a comparative measure, we have the nano (XNO), with NC = 9 at the moment, but which normally fluctuates between 10 and 12.

Pie chart with the nakamoto coefficient and the decentralization of Nano.  9 entities being the largest: 17.84%, 10.9%, 10.36%, 9.08%, 6.15%, 4.71%, 3.96%, 3.16%, 1.97%
nano: Distribution of the Weight of the Votes of the Main Representatives/Entities” – Source: NanoCharts

O Nakamoto coefficient measures the number of entities that need to be corrupted for consensus centralization to occur. In the case of the Beacon Chain, centralization on Ethereum 2.0 would need more than 4 corrupt entities in the current state of the network, but there is concern about the gradual increase in deposits from the staking pool, Lido.

Centralization on Ethereum 2.0 worries Vitalik

In an interview with Fortune, when asked about the case, Vitalik replied:

“(…) I am definitely worried. I think that’s one of the biggest questions we’re thinking about when trying to figure out how to switch to ‘proof of stake’ in the long term. But I also think it’s important not to catastrophize the issue too much, because that’s what a lot of people do.”

The creator of Ethereum acknowledges that the concern about centralization in Ethereum 2.0 exists and he goes on to explain about the case of the biggest depositor:

“Even with Lido, for example. Lido has about a third [dos depósitos de Ether na cadeia Beacon]. First of all, if you have a third, you can’t reverse the chain or anything else. There are some things you can do. But realistically, the worst you can do is make the finality stop happening for about a day or so, which is inconvenient but not so terrible.”

What he means by that is that already in the current state of the networka Lido could create problems for Ethereum 2.0. Even though some kind of 51% attack is not possible, with a third of the consensus, the node can refuse to validate transactions. With a minimum >67% to achieve deterministic finality, refusing a validator with 33% would create temporary delays in confirmation.

Although Buterin says it is “just an inconvenience”for a network like Ethereum, this delay would mean billions of dollars lostin the hundreds of protocols and platforms or thousands of businesses that already depend on the network to run.

It is important that the investors be aware and take steps to protect their investments. One of the possible measures is that the participants of the pools stop depositing on Lidochoosing other service providers or trying to decentralize and distribute more ethers (ETHs) in staking.

A constant threat is the emergence of new ‘players’ with great concentration of wealthlike BlackRock, for example.

Know more: “Owner of the world” launches ETF based on blockchain, understand more about it

Large funds that hold third-party capital may be able to temporarily dominate the consensus and threaten to become “Web 3.0 owners”, in a possible centralization of Ethereum 2.0.

Pro-decentralization monitoring must be constant and taken seriously.

Read more:

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