The Ethereum Merge is here but could lead to censorship issues
The big Ethereum Merge update is finally here that has switched the blockchain from proof-of-work to proof-of-stake, which is worth celebrating as the biggest upgrade in the history of the blockchain.
It is an extremely important move that fundamentally changes how the validation system works, which has already led to much high energy efficiency and will allow for higher scalability and security in the future. However, this doesn’t mean that there isn’t immediate trouble on the horizon.
In order to become a full validator node, it is required to stake 32 Ether, or approximately $45,000, which is designed to ensure that a node is heavily incentivized in the network’s security.
The problem is that a pre-Merge report showed that approximately 64% of all staked ETH was controlled by only five entities. This raises concerns that Ethereum itself could be much more centralized than ever before now and could be more vulnerable to censorship and government control than ever before, especially because some of those entities happen to be major exchanges such as Coinbase, Kraken, and Binance, which are subject to government regulation.
These risks are balanced by the dominance of Lido Finance, a decentralized staking pool DAO, which was created specifically to offset the buy-up of staked ether by interests such as exchanges.
I share these worries because of what happened with the US Treasury sanctions against the decentralized crypto mixing service Tornado Cash – the first smart contract ever sanctioned by a government. This led the largest Ethereum mining pool Ethermine to censor transactions from Tornado Cash before the Ethereum Merge.
Large corporate holders of staked Ether, such as Coinbase, Kraken, Binance, and others might be forced to follow the laws of their regions and censor transactions if sanctions required them to do so. In the case of Tornado Cash, sanctions required crypto addresses to be banned, but we could see an era where transactions could also go dark in the network.
To their credit, Coinbase CEO Brian Armstrong came straight out and said that if the US government demanded that the exchange censor Ethereum transaction censorship his company would simply shut down staking or put up a legal challenge. However, it’s clear that if this is our future, it will be a fight.
What we need is to push for greater decentralization across Ethereum staking in general and have more people stake their Ether in places that are censorship resistant.
At the same time, we need to continue communicating with regulators and lawmakers that Ethereum is an infrastructure like the telephone system, the internet, or the web. Organizations running nodes should be given the same sort of safe haven that internet service providers do.