How ETH 2.0 will solve the long-standing centralization debate

Decentralization will always be a key pillar of the layer1 protocol if blockchain/smart contracts are to be adopted at scale.

The debate over ETH centrality has long been used as an argument against ETH adoption by well-informed bitcoin investors like Preston Pysh and Lyn Alden. The topic is relatively complex, with slightly different opinions, but one thing we agree on is that decentralization will always be a key pillar of the layer1 protocol if we want blockchain/smart contracts to be adopted at scale.

In this report, we break down the debate into quantifiable pieces and analyze the impact that ETH 2.0 may have on the debate. Much of the literature on this debate was written prior to the ETH 2.0 pledge. We believe that this new data could be a turning point in the adoption of ETH by investors.

A summary of the centralization debate
Contrary to popular belief, (de)centralization can be defined across multiple axes. vitalik Buterin measures (de)centralization through architectural, political and logical axes.

How ETH 2.0 will solve the long-standing centralization debate

While political and logical decentralization is valuable in its own right, the debate about centralization has focused primarily on the architectural axis. After all, if it is sufficiently centralized, a local compromise on this axis could cause the entire network to collapse.

We propose to divide the architectural axis into the following areas

Consensus/Miner (de-)centralization

Node/Storage (de-)centralized

Wealth (de-)centralization

Let’s look at these in more detail:

Consensus/Miner (de-)centralization

This argument is for ETH 1.0, where the high centralized hash rate output of a small number of miners can endanger the entire network if the verifier chooses to be complicit.

On this metric, ETH performs about the same as BTC, with no one (or two) miners generating more than 50% of the count. This is important because malicious conspiracies between more than 2 parties are difficult to execute because even if one of them deviates, the cost will be high.

How ETH 2.0 will solve the long-standing centralization debate

As ETH moves to a PoS mechanism under 2.0, we expect consensus to become more decentralized and have more participants as the barriers to becoming a verifier are lowered. We are actually starting to see this happen. In the last 7 days, there are 63 active ETH pools/miners in ETH 1.0; under ETH 2.0, about 27k unique wallets have committed to pledging.

Node/storage (de)centralization

This is what makes the argument so crucial. Under ETH 1.0, consensus and storage are separate. Running dedicated hardware to address Ethash functionality is what miners have agreed upon. Since this is only feasible for a small number of people, another group must run and operate the nodes. The purpose of the nodes is to store and relay the transaction history of the blockchain and to verify transactions added by miners.

There are three types of nodes: archival nodes, full nodes, and light nodes. The amount of data in each storage blockchain is decreasing. We really care about full nodes because they host enough data to protect the network in a decentralized way, but few people can run it. Under ETH 1.0, every Dapp developer needs to run a node so that the system can eventually become distributed enough over time.

However, running a node is a tedious task, and node runners, unlike miners, are not compensated for running nodes. As a result, many Dapp developers choose to run their nodes through an infrastructure-as-a-service (IaaS) provider such as Infura in exchange for a fee. This is where we run into a triple problem.

The fewer independent nodes, the lower the backup/security

High concentration of nodes with a few large providers poses a key man risk to the system (this was partially realized when Infura was down for 5 hours in November 2020)

Large centralized cloud providers such as Infura that use AWS are known to pose another third party risk

Currently only ~3.8k ETH nodes (compared to ~11k for BTC).

How ETH 2.0 will solve the long-standing centralization debate

In addition, to date, many of these nodes remain concentrated with large cloud providers.

How ETH 2.0 will solve the long-standing centralization debate

When Lyn Alden made this criticism earlier this year, other members of the ethereum community tried to respond to it. Here’s what they had to say in response.

How ETH 2.0 will solve the long-standing centralization debate

As members of the ethereum community, we appreciate Bankless, but we think this response leaves a lot to be desired.

With the huge shift of Ether to ETH 2.0, a lot of the architecture is changing. There are two key elements to this:

Ease of running nodes :

EtherChannel rightly pointed out that the hardware requirements needed to run nodes under ETH 1.0 were a bit of a headache, so it was decided that this would be one of the key principles behind the ETH 2.0 architecture.

How ETH 2.0 will solve the long-standing centralization debate

Below is a comparison between the hardware requirements for ETH 1.0 and 2.0.

How ETH 2.0 will solve the long-standing centralization debate

De-incentivize running nodes:

Under ETH 1.0, most nodes are run by Dapp developers or developers representing Dapp. This was because there were not enough validators/miners to meet the demand for nodes due to hardware limitations.

Under ETH 2.0, anyone with 32 ETH can pledge their ETH to become a verifier/node. Since validators will also act as nodes, the incentive will be adjusted appropriately and, more importantly, there will be enough validators to make the node distribution wide enough and decentralized.

We can see this in the number of unique wallets that have been registered. So far, there are about 27K unique verifiers. This is about 9 times the number of ETH 1.0 nodes, and about 3 times the number of current BTC nodes. (Note: each individual ETH 2.0 verifier can run multiple nodes at 32 ETH each).

How ETH 2.0 will solve the long-standing centralization debate

An important piece of data to further validate decentralization, especially without relying on large cloud providers, is the ISP behind each node (indicating cloud vs. self-control). Similar to what https://ethernodes.org为ETH 1.0 has done. We hope that this data will not be as biased towards cloud providers as it was in ETH 1.0, as more nodes are voluntary (pledgers) rather than mandatory (Dapp developers). The fact that the number of nodes is so high is a positive sign in the first place.

Also, the ethereum community is working on other solutions (weak statelessness/state expiration) to make it easier to run nodes when the blockchain gets bigger.

Wealth (de-)centralization

This view suggests that holders with large amounts of ETH can control consensus by pledging under ETH 2.0. However, this is unlikely to happen, as the top 10 wallets currently control less than 20% of the supply. It is highly unlikely that collusion with so many actors would be successful.

How ETH 2.0 will solve the long-standing centralization debate

Another argument related to this is that large equity pools may capture a large share of the market and potentially monopolize the consensus. While the incentive structure also avoids this (pool leaders must also pledge their own ETH), the data shows that most nodes currently exist outside of exchange pledge pools.

How ETH 2.0 will solve the long-standing centralization debate

A final issue that needs to be addressed is the dominance of certain client software in running nodes. On ETH 1.0, Geth was the client for about 80% of the nodes. If this situation persists in ETH 2.0, a single client’s incorrect update or malware could cause the entire ecosystem to collapse.

How ETH 2.0 will solve the long-standing centralization debate

Ether seems to be pushing for a more even distribution across multiple clients. With ~27k independent verifiers (which contain multiple nodes) coming online, things could change quickly compared to the ~3k nodes online today. Data on this is not yet available, but we will continue to monitor this metric.

Overall, Ether is an ambitious project that aims to harness the full potential of blockchain technology. It is by no means in a final state and, like any good technology, it is constantly iterating. If blockchain technology is to reach its full potential, it is likely to do so through ETH.

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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