The Ethereum Merge is here but could lead to censorship issues [58]
Ethereum’s proof of stake model could make it vulnerable to censorship because of centralization
Good afternoon, friends!
The big Ethereum Merge update is finally here that has switched the blockchain from proof-of-work to proof-of-stake, which is worth celebrating as the biggest upgrade in the history of the blockchain.
It is an extremely important move that fundamentally changes how the validation system works, which has already led to much high energy efficiency and will allow for higher scalability and security in the future. However, this doesn’t mean that there isn’t immediate trouble on the horizon.
In order to become a full validator node it is required to stake 32 Ether, or approximately $45,000, which is designed to make certain that a node is heavily incentivized in the security of the network.
The problem is that a pre-Merge report showed that approximately 64% of all staked ETH was controlled by only five entities. This raises concerns that Ethereum itself could be much more centralized than ever before now and could be vulnerable to censorship and government control than ever before, especially because some of those entities happen to be major exchanges such as Coinbase, Kraken and Binance, which are subject to government regulation.
These risks are balanced by the dominance of Lido Finance, a decentralized staking pool DAO, which was created specifically to offset the buy up of staked ether by interests such as exchanges.
I share these concerns because of what happened with the US Treasury sanctions against the decentralized crypto mixing service Tornado Cash – the first smart contract ever sanctioned by a government. This led to the largest Ethereum mining pool Ethermine to censor transactions from Tornado Cash before the Ethereum Merge.
Large corporate holders of staked Ether, such as Coinbase, Kraken, Binance and others may be forced to follow the laws of their regions and censor transactions if sanctions required them to do so. In the case of Tornado Cash, sanctions required crypto addresses to be banned, but we could see an era where transactions could also go dark in the network.
To his credit, Coinbase CEO Brian Armstrong came straight out and said that if the US government demanded that the exchange censor Ethereum transaction censorship his company would simply shut down staking or put up a legal challenge. However, it’s clear that if this is our future, it will be a fight. Although, that may be tested when the time comes.
What we need is to push for greater decentralization across Ethereum staking in general and have more people stake their Ether in places that are censorship resistant.
At the same time, we need to continue communicating with regulators and lawmakers that Ethereum is an infrastructure much like the telephone system, the internet, or the web. Organizations running nodes should be given the same sort of safe haven that internet service providers have.
As in the past with the cipherpunk movement, this is still a pivotal time for the blockchain, where standards and regulations are colliding. If we are going to have any sense of the future we are going to have to stand up for it by making certain that the community works toward protecting it.
As usual the summary of this week’s news is below and the long-form is all below the fold. See everyone next week!
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Blockchain Bulletin
White House releases framework for crypto regulation and development. A report out of the White House has listed the conclusion of six months of research from multiple federal agencies about the crypto industry regarding the responsible development of digital assets, reported by Decypt.
Bitcoin miner hosting firm River purchases 3,000 mining machines. The Bitcoin-focused fintech firm River has purchased 3,000 ASIC mining machines that will mostly be hosted in its wind-powered Texas operation, reported Bitcoin Magazine.
Blockchain Behind the Scenes
The Ethereum Merge has forever changed Ethereum, long live Ethereum. The Ethereum Merge upgrade has happened that moves the blockchain from a Proof of Work validation system to Proof of Stake, bringing its energy efficiency up to 99%.
Coinbase employees and Ethereum backers sue US Treasury over Tornado Cash ban. Coinbase is funding a lawsuit against the US Treasury sanctions against Tornado Cash led by Coinbase employees and Ethereum backers claiming that the Treasury overstepped its authority.
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