In Ethereum’s case, the blockchain is decentralized, so no person or group has sole control over the network. Virtually anyone can use Ethereum to create and secure digital technology, meaning users have complete freedom to do whatever they want. Few individuals consider the impact of the Ethereum price on their experience. Decentralization aims to remove and prevent the concentration of power, reducing the trust that blockchain participants must have in one another. According to Binance, Ethereum was envisioned as a platform to build various applications, ranging from financial services to social media and even new forms of governance.
Ethereum actively shapes the future of blockchain and digital transformation. Still, it faces an endless challenge – centralization. The cryptocurrency industry, renowned for its promise of autonomy, wants everything as decentralized as possible, but it also yearns for fast transactions and low fees. Ethereum has become more centralized, with Lido controlling most of the staking activity, and this poses risks that can be exploited by malicious actors (i.e., outside attackers). The potential impact can be catastrophic, leading to market crashes, not to mention protocol failures. Equally, it could hinder innovation within the Ethereum ecosystem because many entities could prioritize their interests.
The Rise in ETH Staking Post-Merge and Shanghai Has Come at A Cost
On September 15, 2022, Ethereum adopted the Proof of Stake consensus mechanism, which selects validators in proportion to the quantity of staked assets. Commonly referred to as Ethereum 2.0, the upgrade was finalized by joining the Beacon Chain with the Mainnet. The Shanghai upgrade was the next important milestone for Ethereum, giving stakers access to their rewards. The upgrades mentioned above weren’t just a luxury; they were essential for the success of Ethereum. Notable developments could be noticed, particularly in the realm of staking. Without native staking options, a new playing field emerged – staking pools.
Staking helps secure the Ethereum blockchain and incentivizes users to maintain its integrity. A staking pool allows individuals to combine and lock their ETH and earn block validation rewards. The larger the pool, the more rewards each participant receives. Indeed, solo staking has many benefits, but it’s technically complex and expensive, even if it helps make the blockchain more valuable in the long run. Staking pools come to the help of smaller validators who don’t have sufficient tokens to participate in the Ethereum network and earn rewards. ETH staking draws the attention of both custodial and non-custodial entities alike, and the competition between the two could have implications for Ethereum’s future.
If Lido Becomes Too Powerful, It Could Gain Control of The Ethereum Network
Lido operates as a liquid staking solution for Proof of Stake cryptocurrencies, democratizing rewards for even the most minor deposits and ensuring utility without the traditional constraints associated with asset lock-ups. Users can freely transfer ETH while still earning staking rewards. Unfortunately, Lido poses risks to Ethereum’s health. When a couple of large entities control a considerable amount of the network’s staked ETH, it can engender a lack of centralization, not to mention severe consequences. Lido relies on third-party cryptocurrency custodians, meaning users might face vulnerabilities like security breaches or mismanagement of funds.
Lido’s dominance in the staking market brings to attention the threat of centralization on Ethereum, the impact of which could be catastrophic. Even Vitalik Buterin, Ethereum’s co-founder, has acknowledged the risk Lido’s DAO approach poses, creating a scenario of potentially attackable governance controlling many of Ethereum’s validators. He suggested ecosystem participants should diversify to various staking pool operators, at least for the short term. Furthermore, Buterin proposed rainbow staking as a solution to centralization concerns around ETHstaking. The aim is to prevent liquid staked tokens from overtaking Ethereum’s native cryptocurrency.
Should Lido’s Market Monopoly Keep You Up at Night? Why, Yes!
The potential of Lido to influence network decisions or become a target of regulatory scrutiny could undermine Ethereum’s tenacity and autonomy, to say nothing of the fact that the reliance on a couple of central nodes to validate transactions and blocks by checking for inconsistencies defies the network’s ability to hold out against censorship and maintain its open permissionless nature. Put simply, centralization vis–vis Lido could lead to the loss of everything on Ethereum and the failure of the DeFi protocol. The financial industry has been under the control of centralized systems for a significant amount of time, with several institutions controlling the money supply. Security, privacy, and decentralization provide enough value in themselves.
According to Vitalik Buterin, there aren’t as many solo stakers as necessary due to technical challenges (i.e., running nodes) and financial challenges (i.e., staking requires a minimum of 32 ETH). Conversely, having too many validators isn’t the perfect or ideal solution, leading to issues like failed transactions. The group of individuals allowed to participate in the consensus would be marked by confusion as they would lose their staked tokens by slashing instead of market-leading validators. In an ideal ecosystem, there’s a balance between stakers with a good infrastructure setup for secure validation. None of them should be dominating the market.
Concluding Thoughts
The question now is: What’s the worst that can happen? Centralization would lead to the concentration of authority at a central point, and the risk isn’t de minimis. Nothing would deter malicious validators from attacking the Ethereum network, rewriting parts of the blockchain, changing the order of new transactions, or censoring specific blocks. A more centralized ETH would have to match regulators’ expectations that go against blockchain technology’s decentralized and permissionless nature. Nevertheless, stricter regulations would protect investors who lose out when cryptocurrency exchanges collapse.
Finally, yet importantly, if the cryptocurrency community appreciates Ethereum’s centralized nature, it could result in a loss of trust and support, leading to reduced development activity, fewer dApps, and users migrating to other blockchains. Cryptocurrency was introduced to address the fading trust in financial institutions, but it hasn’t lived up to its initial excitement. There’s no better time than now for Ethereum to reinforce its credentials.
