Is PoS Ethereum in danger of censorship?

Ethereum might be in danger of censorship, a crypto expert from Merkle Science warns. The main threat lies in the post-Merge consolidation of validator nodes.

Censorship

After successfully transitioning to Proof-of-Stake, Ethereum might be more susceptible to censorship, says Coby Morgan, an ex-FBI analyst and the lead investigator at Merkle Science, a web3 security and intelligence company. Responding to CoinTelegraph request for comment, Morgan noted that the Merge bolsters the position of the major players and might result in the consolidation of validator nodes. With the new consensus mechanism at play, industry leaders, such as Binance, Coinbase, or Kraken, are able to gain leverage over smaller parties in the Ethereum space.

64% of staked Ether is managed by five entities

As usual, it's all about the money. The cost of becoming a full validator is 32 Ether (ETH), an equivalent of $47,000 at the moment of writing – a prohibitive amount for most crypto users. According to the recent report from Nansen, a Singapore-based crypto analytics company, as much as 62% of staked ETH is managed by only five organizations.

9 addresses hold almost half of the governance power

As illustrated on the chart, nearly one-third of the pool is controlled by the three leading crypto exchanges, while almost a quarter is held by an undisclosed entity. The top player in the ranking, Lido Finance, is a DAO and a staking services provider. Nansen's report brings to attention that “9 addresses (excl. Treasury) hold ~46% of governance power, and a small number of addresses typically dominate proposals. The stakes for proper decentralization are very high for an entity with a potential majority share of staked ETH.”

A diagram of staked ETH by entity.
Image: Nansen

Lido has solutions but itself suffers from centralization

The risk of over-centralization has long been addressed by Lido. The community has proposed a series of initiatives designed to counteract the consolidation in the Ethereum space, including dual governance or a more diverse and thoroughly distributed validator set. However, Lido itself may be burdened with centralization, with a relatively high concentration of ownership in the hands of large LDO (Lido's governance token) holders.

Ether stakeholders may be subject to the “whims of governments”

According to Morgan, the danger of censorship stems primarily from the fact that the larger stakeholders will be “subject to the whims of governments in the world.” Consequently, sanctioned addresses may be identified by government-influenced validators, “slashed rewards and then eventually kicked off the system.”

What has Vitalik to say about the censorship on Ethereum?

Obviously, the censorship issue has not escaped the attention of the “higher ranks” of the Ethereum community. Vitalik Buterin discussed this problem during Ethereum Core Devs Meeting #145, held on September 18.

https://www.youtube.com/watch?v=jJaCaS0WbIw

Ethereum co-founder made a similar observation to that of Morgan, that the “compromised” validators might block sanctioned transactions. But there's hope that not all validators will submit to the governments' whims. This way, sanctioned transactions could be picked up in later blocks, resulting in a delay rather than full censorship.

Let's talk some more about the stack decentralization

For many Ethereum users, the censorship issue is a fundamental one. With decentralization being one of the core aspects of the crypto industry, there is a call for a more extensive dialogue on the distribution of the stack.