64% of staked ETH controlled by 5 crypto giants: Ethereum facing centralization

The Merge is coming – No one is without knowing it, Ethereum is preparing to change its consensus system. Thus, the network will abandon 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 Merge marks the abandonment of Proof of Work in favor of Proof of Stake.

To do this, the execution layer will be connected to the consensus layer in Proof of Stake. In practice, the consensus layer is ensured by the beacon chain. This was launched in December 2020 and has since been running alongside Ethereum.

Its launch marked the beginning of ETH token staking. Indeed, users are able to block 32 ETH on the beacon chain to participate in the validation process transactions.

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The gold Rush

Quickly, tens of thousands of ETH are sent to the deposit contract. Currently, the beacon chain has no less than 426,000 validatorsfor 13 million ETH deposited.

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

To put this data into perspective, it is approximately 11% of total ETH supply which is currently posted on the beacon chain.

Ethereum: the threat of centralization

There are several ways to participate in the validation of blocks on the beacon chain. At first, users with 32 ETH can operate a validation node themselves. It still requires a certain hardware infrastructure to ensure its proper functioning.

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

To do this, they can join two types of staking pools:

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

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

Indeed, the five main staking pools represent 64% of all ETH stake on the beacon chain.

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

This centralization has raised 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 regulatory constraints. Consequently, too much centralization around these actors could turn out to be dangerous for censorship resistance.

Secondly, the centralization around these pools leads to concerns about the diversification of customers. Indeed, unlike many blockchains, Ethereum has several client software. This diversity has been put in place to reduce dependence on a single customer.

However, staking pools are not the best performers in terms of diversification. Indeed, most of them use the Prysm client, generating centralization around it.

Other concerns rise alongside The Merge. Thus, a researcher discovered that it would be possible for some validators to produce two blocks in a row. A situation that could prove to be a vector of attack.

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John R. Zepeda

I have extensive experience working as a content writer in the areas of cryptocurrencies and finance, where I create interesting pieces that both inform and engage their audiences.

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