64% of Deployed ETH Controlled by 5 Crypto Giants: Ethereum Facing Centralization

The merger is coming – No one is without knowing, Ethereum is preparing to change its consensus system. The network will thus waive the Proof of Work in favor of the Proof of Stake. However, some players in the ecosystem are starting to worry about too much centralization of staking on Ethereum.

Ethereum moves to Proof of Stake

The Ethereum network is gearing up to switch consensus mode in the coming days. So the update the fusion marks the abandonment of Proof of Work in favor of Proof of Stake.

For this, the execution layer is linked to the consensus layer in Proof of Stake. In practice, the consensus layer is ensured by the beacon chain. It was launched in December 2020 and has been running alongside Ethereum ever since.

The launch marked the beginning of the staking of ETH tokens. Indeed, users can: block 32 ETH on the beacon chain to participate in the validation process transactions.

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The gold rush

Soon, tens of thousands of ETH are sent to the deposit contract. Currently, the beacon chain has no less than 426,000 validatorsdeposited for 13 million ETH.

Evolution of the number of validators on Ethereum in Proof of Stake.

To put this data into perspective, it’s something like: 11% of total ETH supply currently on the beacon chain.

Ethereum: The Threat of Centralization

There are several ways to participate in the validation of blocks on the beacon chain. Initially, users with 32 ETH operate a validation node yourself. It still requires some hardware infrastructure to ensure proper operation.

However, users who do not have access to this 32 ETH can also participate in the validation process.

To do this, they can participate in two types of strike pools:

  • Centralized stakeout poolsoperated by Coinbase, Kraken or Binance;
  • So-called “liquid” strike poolsmanaged by protocols such as Lido or RocketPool.

However, the use of these infrastructures, while facilitating access, creates a major problem of centralization.

Indeed, the five main stakeout pools represent: 64% of all ETH stocks on the beacon chain.

Diversification of stake pools on Ethereum
Diversification of stake pools on Ethereum – Source: Nansen.

This centralization has led to several concerns on the part of the community.

The risks of this centralization

First, pools belonging to centralized exchanges (Coinbase, Kraken, Binance, etc.) are subject to legal restrictions. Consequently, too much centralization around these actors could turn out to be dangerous for censorship resistance.

Second, the centralization around these pools raises concerns about the diversification of customers. Unlike many blockchains, Ethereum does indeed have different client software. This diversity has been introduced to reduce dependence on one customer.

However, strike pools are not the best performers in terms of diversification. Indeed, most of them use the Prysm client and therefore generate centralization.

Other concerns arise alongside The Merge. For example, a researcher discovered that it would be possible for some validators to produce two blocks in succession. A situation that could prove to be an attack vector.

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