- The Ethereum network has recently faced criticism following its Merge, which switched the blockchain to a Proof-of-Stake consensus mechanism.
- New data suggest that exchanges on the blockchain now control over 60% of mining pools.
- Analysts cite expensive staking fees and market dominance as reasons for exchanges having an edge in staking Ethereum (ETH).
The Ethereum Merge took the blockchain to a Proof-of-Stake (POS) consensus mechanism, ridding it of miners and replacing them with validators. While switching to PoS has several benefits, the downside is now trickling home.
Since the launch of Ethereum in 2015, it has been touted as a truly decentralized platform, becoming the second-largest network and the largest in terms of decentralized applications (DApps). While decentralization is at the center of the creation of distributed ledger technology (DLT), certain factors may introduce subtle elements of centralization.
Following the Merge last month, miners have been relegated off the network and replaced with validators that require at least 32 ETH to produce a new block. While this was longed for because it reduces the network’s electricity usage and slightly increases its speed, it poses a problem as most users cannot afford 32 ETH to join the validation process.
The high cost of mining ETH has seen users turn to mining pools on centralized exchanges like Binance, Coinbase, Lido Finance, and Kraken. With 14 million ETH worth roughly $19.2 billion staked on the Ethereum blockchain since the Merge, about 60% are in control of centralized exchanges giving these few entities powers over the validation process, which is fundamental to the chain.
Caleb Sheridan, the co-founder of the Eden Network, expressed his concern about the issue but stated that any possible problem arising from over-centralization could be rectified by staking more ETH.
“I imagine we would see more [ETH] staked to counteract any behavior perceived as harmful to the network.”
More problems mount for PoS
PoS consensus mechanisms have been hailed as the “ultimate upgrade” of the Ethereum ecosystem as they will reduce energy usage and improve speed while giving validators staking rewards. It has not been all rosy for Ethereum’s PoS as analysts have cited network safety as the Proof-of-Work (PoW) model is the safest mechanism for users’ assets.
In a PoS validation, bad actors gaining control of two consecutive blocks is dangerous to the network’s security, as Ethereum is said to have compromised the level of security and efficiency for speed. Coupled with these is also the protest by some miners to preserve the PoW mechanism leading to hard forks on the Ethereum Network.