Could Post-Merge Ethereum Have a Centralization Problem?

Ethereum recently completed its long drawn-out merge into Ethereum 2.0 but the difficulties it has faced have only been necessary for the opportunities it could achieve. 

It takes time for a platform to completely reinvent itself. Today, the price of Ethereum sits around $1,000, making it the leading crypto coin behind Bitcoin. With the merge currently being phased into the existing network, however, that price is set to soar higher than ever before, with some experts even suggesting that Ethereum could overtake Bitcoin in the next ten years. 

So What Is The Merge Going To Do For Ethereum?

Having already instigated the new beacon chain and its proof-of-stake (POS) consensus method, Ethereum is yet to introdcuce its sharding mechanism, which is due to entirely reinvent the way the blockchain works. Blockchains like Bitcoin still run on a proof-of-work (POW) system which asks its users to mine a block to validate the hash. This uses a large amount of computer power and energy, with miners competing against each other to calculate the correct hash, with the winning validator being rewarded in the network's token. 

With POS, however, this process is different. Now, instead of competing against each other, users of Ethereum will instead deposit 32 ETH to become a validator. The blockchain will then select a validator at random to verify the hash, rather than allowing several miners to calculate and validate blocks. Under this mechanism, the process of forming new blocks and validating existing ones has become far safer and more sustainable. 

As well as this, the blockchain will become far more efficient with its use of sharding. Here, the running of nodes is going to be made easier, as each user will store just a fraction of data in order to speed up the platform and prevent users from having to store an entire blockchain history. In this way, validators of Ethereum will be able to confirm data and make it available to the network as a whole, which will subsequently create a far more efficient, fast and secure method to run nodes. 

With this in mind, it’s fair to say the merge is a positive and revolutionary step for Ethereum. But that doesn’t mean it’ll be an entirely smooth ride. 

The Post-Merge Centralisation Problem

Ethereum co-founder Vitalik Buterin has publicly stated that he is worried about the risk of centralization following the merge’s completion. Right now, Ethereum remains a decentralised organisation, meaning the control and decision-making is down to a distributed network rather than an organisation or individual. Because of this, there is no need for a middleman to make decisions, with a far lower risk of the platform being ruled by a single point of power, authority or control. This is the same across the majority of the market, with even Bitcoin remaining decentralised despite its current high price and status as a market leader.

Having said this, a decentralised finance platform could disturb the network now that the POS mechanism has been put in place. It would allow owners of ETH to earn a passive income without actually having to sell their tokens. These staked coins are then used to validate transactions and secure the network.

The reason this is potentially damaging is that, under the POS system, solo-staking requires users to set up dedicated hardware and deposit 32 ETH to become a validator. A decentralised finance platform, on the other hand, enables users to pool their ETH and participate in staking even if they have not deposited the necessary 32 ETH. This brings with it a centralisation risk, as a single platform’s dominance in the staking community (as well as its hyper-concentrated staking power) could lead to a centralised attack on the network once it has switched to POS.

Is A Centralised Attack Going To Happen?

While Buterin has noted his concern about the risk of centralisation, he has also stated that it is important “not to catastrophize the issue”. According to him, although concerns about centralisation are warranted, one of the largest decentralised finance platforms currently has around twenty-one delegates and nodes who are running the validators inside of the organisation, which means that there is a good amount of decentralisation already present within the network. 

Similarly, decentralised finance platform developers believe that these platforms provide more transparency on validators responsible for staking. For them, the whole point of the project is to decentralise ETH staking and prevent centralised platforms from dominating the market. Meanwhile, a researcher at the Ethereum Foundation, Danny Ryan, has suggested placing a limit on the level of ETH which can be staked could stop an organisation gaining majority control of a distributed ledger and interrupting the recording of new blocks.

Should Users Of Ethereum Be Concerned?

Whatever happens, it seems like investors do not have to be too concerned about an actual centralisation attack on Ethereum’s network, especially as this sort of attack is at the forefront of Buterin’s attention. After all, one of Ethereum’s key traits is its decentralised blockchain, as well as its active push for decentralised projects to be formed inside its network. The end goal is to ensure that, when Web3 comes around, the internet becomes entirely decentralised on a blockchain. 

For this reason, any threat to Ethereum’s own decentralisation is going to be investigated and discussed with transparency. Most ETH traders are excited about the prospects that the merge has to offer, and the benefits of gaining an abundance of new users, projects and staked ETH. In this light, any issues surrounding centralisation are likely to be quenched as soon as they begin, and it’s unlikely that any singular entity will gain an authority rule over the Ethereum network.