Don’t expect CeFi to save Ethereum

Nothing is absolute, we must evaluate the pros and cons of Ethereum PoS and PoW from different perspectives. But if we compare security to decentralization like apples to oranges, the discussion will be meaningless.

Don't expect CeFi to save Ethereum

We can think about censorship resistance from at least two perspectives:

1. If censored, how long will your transaction be blocked?

2. If censored, can you guarantee that your transaction can still be packaged on the chain in the future?

And to prevent a 51% attack, let’s consider the following two aspects:

1. How much does a hacking attack cost?

2. How likely are they to rent enough mining equipment?

For the Ethereum merger, we should not simply say that the decentralization and security level of PoS is “higher” or “lower” than that of PoW, the scope of these issues is too broad. So, let’s dissect them one by one.

First, let’s talk about security. There is no doubt that the cost of attack under PoS has indeed become higher. This has been discussed many times. If you try to attack a PoW network with your crazy hash rate, your real cost is just your electricity bill. Attacking the network won’t change your hashrate, especially when the percentage of graphics card miners on the market is high. Even if your attack fails, you can dismantle crypto mining facilities and sell those graphics cards.

But if you attack the PoS network, you risk losing all your staked ETH. This increases the cost of an attack hundreds of times. We must realize that the cost of attacking PoW is temporary, while for PoS, it is permanent.

However, when considering renting mining equipment, PoS is a little bit worse. Given the physics of PoW mining, miners are scattered all over the world, making it difficult for you to rent 51% of the total ETH hashrate. It’s not a cost issue, it’s a “one or zero” issue.

PoS is different. There are currently 120 million ETH in circulation, of which more than 13 million are pledged on the beacon chain. In theory, as long as you can “borrow” 5% of the circulating ETH, you can carry out a 51% attack. Of course, I’m not saying it’s easy, it’s still very difficult, but not as difficult as PoW.

In a centralized world, lending may require some collateral, or may rely on reputation, or even power, such as regulators, so here comes our second question – censorship resistance, which is decentralized part.

At least 2/3 of Ethereum Beacon Chain nodes are under the jurisdiction of U.S. regulators, which could lead to compromised censorship resistance. The discussion on the subject started with this tweet:

Don't expect CeFi to save Ethereum

After the merger, the top 4 entities are Lido, Coinbase, Kraken and Binance, which together account for more than 55%.

Don't expect CeFi to save Ethereum

Let’s take Tornado Cash as an example. If U.S. regulations require 2/3 of mining pools to ban a transaction, it will take longer for Tornado-related transactions to go on-chain. It used to take about 12 seconds, but it could take 30+ seconds in the future, or even a minute or two if you’re unlucky.

As you can see from the curve below, the probability of a transaction being banned for 1 minute in a row is about 7%, which is a bit disappointing.

Don't expect CeFi to save Ethereum

But in fact, this is not a consensus problem of PoS. This is about the miner changes. In the past, the top 10 PoW mining pools accounted for 78% of the computing power. In theory, they could also jointly censor your transaction and prevent it from going on-chain.

Many of these are mining pools with a continental background, and some are located in Russia and Central Asia. China and Russia are among the few regions in the world that the United States cannot directly sanction. Therefore, censorship resistance is not about technology, but about the location of miners.

Today’s PoS pools, whether Lido, Coinbase or Kraken, are based in the US and are therefore heavily restricted. Although they are all making positive statements now, it is only a matter of time before regulators review illegal transactions in the future. PoS is actually worse than PoW in terms of censorship resistance.

There is also a metric to evaluate the pros and cons of PoW vs PoS, which is the worst case, whether you can guarantee that your transaction will at least be on-chain. Let’s continue with the calculation above, if we still assume that 2/3 of the nodes are in censorship, then the probability of a transaction hitting the chain within 10 blocks is still 98%. You can always find mining pools that ignore US regulatory requirements, the only thing you have to do is wait.

Don't expect CeFi to save Ethereum

What if the ruling government decides to roll back your deal after finding out that you can always get out of sanctions by waiting longer?

First, this issue is no longer within the scope of the discussion of resistance to censorship. It’s almost like a direct attack on the network. The probability of this happening is extremely small, but not zero.

For example, a Tornado Cash-related transaction ends up on the chain through a node that is not regulated by the government. At this point, the supervisor who controls 2/3 of the nodes can directly fork the network, remove the block containing the transaction, and make it never on the chain. Although they cannot delete the transaction, they can simply discard the block, which can be done in a single Echo under PoS.

In this case, some members of the Ethereum community have proposed “Social Slashing”, which is to confiscate the ETH pledged by these nodes. However, this could lead to a new totalitarianism. Ethereum should not adopt those rules that do not exist on the blockchain.

Also, current pool nodes are often connected to MEV tools such as Flashbot. However, Flashbot is also regulated. This means that transactions that do not meet regulatory requirements will not appear in the Flashbot transaction list at all, and the nodes containing these transactions will be affected. Therefore, nodes also need more MEV tools.

Last month, Coinbase came out and said they would rather get out of the Ethereum staking business than censor the network to comply with sanctions. However, the pledge service is very profitable. It is expected that the annual interest rate of pledge can reach 6-8%, and the commission can be charged at 10%-20%. If Coinbase stops providing staking services, it will lose at least tens of thousands of ETH every year based on only 1 million ETH in their cold wallet.

So this business will definitely go on forever. Of course, regulators will continue to oversee.

So, we can’t really count on CeFi to save the Ethereum network, be it Coinbase, Lido (semi-CeFi) or Flashbot (centralized tool). Instead, we have to make technical improvements and optimizations to the chain itself. there’s still a long way to go.

But only then can we secure our Ethereum network.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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