Ethereum co-founder Vitalik Buterin has identified potential risks in the Ethereum network, especially around the blockchain’s staking protocol. According to Buterin, Ethereum risks Proof-of-Stake centralizing because of economic pressure. The co-founder stated that the existence of economies of scale in the core Proof-of-Stake mechanism would naturally lead to large stakers dominating and small stakers dropping out to join large pools.
In a recent publication, Buterin further highlighted that the dropping out of small stakers to join the larger ones could expose the Ethereum network to higher risks of 51% attacks, transaction censorship, and other crises. The blockchain expert also cited the possibility of risking value extraction, where only a small group would claim all the value meant to go to Ethereum’s users.
Possible futures of the Ethereum protocol, part 3: The Scourgehttps://t.co/mtzH1ZxTak
(I tried my best to be fair to all sides of the debates here!)
— vitalik.eth (@VitalikButerin) October 20, 2024
Buterin highlighted two areas of interest where the identified risks exist. The Ethereum co-founder noted that network centralization could affect block construction and staking capital provision. According to Buterin, more prominent network participants can use their capacity to run more sophisticated algorithms to generate blocks, allowing them to generate higher revenue.
Additionally, Buterin noted that the same category of participants can deal with the inconvenience of having their capital locked up, unlike their smaller counterparts. The Ethereum co-founder foresees the more prominent Ethereum users doing this by leasing the locked capital to others as liquid staking tokens (LST), shifting the risks to the smaller users.
Meanwhile, Buterin noted that his understanding of these risks increased significantly in the past year, which aligns with the completion of Ethereum’s upgrade. The latest event in the upgrade, the Dencun Upgrade, happened in Q1 2024, increasing Ethereum’s scalability and efficiency through nine EIPs.
The upgrade marked the completion of Ethereum’s transition to Proof-of-Stake, changing the network’s internal operational model. In the meantime, most Ethereum users think the effect of the transition is yet to be reflected in the network’s native cryptocurrency, ETH. The blockchain token traded for $2,639 at the time of writing, 35.6% lower than its $4,000 yearly high, according to data from TradingView.