What does the data tell you about the degree of decentralization of Ethereum 2.0 pledge?

Retail and institutional users’ interest in staking for Ethereum 2.0 continues to rise, and each of their deposits will push Ethereum 2.0 towards or away from decentralization.  

What is Ethereum 2.0?

Ethereum 2.0 is a series of upgrades with different transfer times. It’s best to think of it as an attempt to scale up Ethereum while maintaining security, decentralization, and sustainability.

As of now, the main milestones of Ethereum 2.0 include:

The launch of the beacon chain, which was launched in December 2020.

The beacon chain is incorporated into the main network, which marks the transition of Ethereum from Proof of Work (PoW) to Proof of Obtaining (PoS) consensus mechanism.

The implementation of the sharding chain will take place sometime in 2022.

The PoS blockchain is designed to have a stronger decentralization function. In proof of work, users will need computing resources (and some technical capabilities) to generate blocks and verify transactions. In Proof of Stake , anyone who has ETH above the threshold level can participate in this process. This encourages more nodes to verify transactions on the Ethereum network, leading to a reduction in the risk of most people’s attacks.

The deposit contract of Ethereum 2.0 has been online since November last year. The Ethereum address that intends to participate in the Ethereum pledge must deposit at least 32 ETH, and these ETH will be locked until the Beacon chain is merged. This creates obstacles for those who own less than 32 ETH or who like to hold liquid assets. Therefore, some users may prefer to StakeETH through centralized exchanges like Binance and Kraken, or liquid staking protocols like pdo and Ankr.

Decentralization of Ethereum Staking

Nansen | Behind the data: What changes will Ethereum 2.0 bring?

Although centralized entities like Kraken and Binance continue to hold a sizable share of Ethereum 2.0 pledges, they seem to be losing shares and are replaced by pdo Finance and non-physical alternative pledge solutions. Just recently, the shares of the top 4 entities (pdo, Kraken, Binance, Staked.us) in deposit contracts totaled approximately 36.6%.

The Satoshi Nakamoto coefficient is a statistic used to quantify the degree of decentralization in various blockchains. It represents the number of operators that can collude to attack the network.

Assuming a 34% threshold, given that pdo has 9 Ethereum nodes, it is estimated that there are 12 today. Assuming a 51% threshold, this number should be much larger.

Nevertheless, the rise of pdo marks a huge improvement in the distribution of network control rights. On March 1, 2021, Kraken (14%), Staked.us (8.2%), and Binance (12.9%) jointly controlled more than 34% of the total shares.

The Herfindahl-Hirschman Index (HHI) is used by Vitapk and Satoshi Nakamoto’s coefficient to measure decentralization. We can calculate HHI by squaring the share of each source address in the total shares of Ethereum 2.0 and adding the resulting numbers.

Nansen | Behind the data: What changes will Ethereum 2.0 bring?

Although obviously not all deposit addresses are independent, this trend does show that HHI is gradually decreasing over time. Nevertheless, it is important to remind yourself that the risk of centralization exists at every layer of the blockchain technology stack. According to data from Ethernodes, more than 21% of Ethereum nodes run on Amazon Web Services.

Analyze deposit activity

Staking interest in Ethereum 2.0 surged during November 2020, reaching a peak of 4788 deposits per day, and then gradually disappeared in early 2021. In the first quarter of 2021, the peak daily deposits never exceeded 1500. In May 2021, activity began to heat up.

The strange thing about deposit activity is that it is irregular and seems to be completely unrelated to the price of Ethereum. The number of deposits began to decline on May 5, just as Ethereum gradually approached the high of $4,000. Then from May 15 to June, the number of deposits increased significantly because the value of Ethereum continued to rise.

In June, the value of Ethereum almost halved. Later, we saw strange peaks in the number of deposits on different days in June.

Nansen | Behind the data: What changes will Ethereum 2.0 bring?

Nansen | Behind the data: What changes will Ethereum 2.0 bring?

Splitting the data by week and hour (UTC) may reveal one or two things about the geographic concentration of ETH 2.0 pledgers. The unevenness of the distribution is worthy of our careful study.


Ethereum 2.0 represents a clear change in the security and economic model of Ethereum, which has multiple effects and may change the behavior of participants. First, Ethereum is transformed into an inherent income generating asset. For example, pdo provides an annual interest rate of 5.4% for collateralized Ethereum, which is much higher than the interest provided by currency markets such as Compound and Aave.

As retail and institutional interest in betting on Ethereum 2.0 continues to rise, there has been controversy regarding the centralization of betting on Ethereum 2.0 around betting-as-a-service providers and custodians. This is not a small problem, because the concentration of equity in large suppliers may destabilize the network and incentivize bad behavior among nodes. Non-technical users should and must incorporate this factor into their decision when choosing a supplier. Every deposit will push the blockchain toward or away from decentralization.


Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/what-does-the-data-tell-you-about-the-degree-of-decentralization-of-ethereum-2-0-pledge/
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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