Ethereum and the path of centralization
There is no doubt, Ethereum was the first blockchain to allow smart contracts. In innovation, it can be said that it was the second great milestone of cryptocurrencies after the creation of Bitcoin in 2009.
Personally, I'm not a big fan of Ethereum and the path of centralization that this system and its cryptocurrency are taking, but you have to recognize the merit of each one and Ethereum was a pioneer. Today I plan to tell you a little more about this network and the problems it is currently facing and possible consequences.
If you are interested in learning about Ethereum and the path of centralization it is taking, I invite you to read this article carefully. We already started!
It can be said that Ethereum marked the beginning of Web 3.0 by allowing decentralized applications to be created on its blockchain. This marked a new era in terms of the possibilities of cryptocurrencies and online interaction.
The idea for this system came in 2013 from Vitalik Buterin, a Russian-Canadian developer. In 2015, after having raised funds for its development and carrying out a pre-sale of tokens, Ethereum was finally launched. In this process, 72 million ETH were awarded and distributed to the people who financed the initial project. These initial coins represent about 60% of the total coins in the system today (June 6, 2023). From the beginning, this constituted one of the main criticisms due to the centralization that it implied and from which it has not yet come off as we will see later.
The goal of Ethereum was to create a decentralized platform that would allow developers to take advantage of Smart Contract technology to develop decentralized applications.
One of the peculiar characteristics of this system is that it allows you to carry out transactions with permission and without permission:
No permission: any computer on the Ethereum network can confirm the transaction.
Authorized: are reviewed only by a certain group of computers, so it is not necessary to be exposed to all computers as long as you follow the established protocols.
Although Ethereum has its own cryptocurrency (ETH), its stated goal has been to become the world's computer on which users can create freely and in a decentralized way. However, this vision of decentralization contrasts with several realities that the network lives.
Well, from its creator to the way decisions are made, in Ethereum, everything has gone through a controversy or scandal that makes us doubt the true decentralization and immutability.
I will start by telling you that for this blockchain, protocol changes do not lead to an on-chain decision-making process. It is the Ethereum Core Dev (who actively contributes to the development of the Ethereum protocol and clients) who decide whether an Ethereum Improvement Proposal (EIP) is applied or not.
Of course, anyone can submit an EIP on Ethereum's Github, but it is the author's responsibility to achieve consensus within the community and document opinions and alternative options. However, there is a great technical barrier to correctly formulating a proposal, so most of those who present them are usually developers.
Disagreements are settled in discussions in public forums seeking to reach a consensus and allowing anyone to contribute ideas. As a rule, one of the defenders of one of the different points of view capitulates or an intermediate point is reached.
If this does not happen, it may be the case of an unplanned hard fork. Well yes, hard forks can be "planned" or "unplanned". In fact, the Ethereum network may hold the record for the most planned forks of the entire crypto universe, and the ones that missing. Since 2016 they have carried out a minimum of 8, their objective has been from adapting the system to manage new needs to introducing security protocols, streamlining the mining process (when they were still a PoW system), or changing the protocol from PoW to PoS.
As you can see, the governance of Ethereum has its flaws, it is not the general users who decide. In theory, those who participate in the network could do it with their nodes. However, considering that currently 46.15% of Ethereum validator nodes are controlled by only 2 addresses, for individual participants to refuse to update the ETH client could put them out of the game.
Unplanned forks can be the result of updates that some feel should not be running. There are two big unplanned hard forks in Ethereum.
This division arose as a result of an unfortunate situation that occurred in 2016 (barely 1 year after ETH was created). This year, $50 million dollars equivalent in ETH was stolen from the Distributed Autonomous Organization (DAO) using a loophole in its code.
This situation opened a breach in the very concept of Blockchain and its principles of immutability. On the one hand, those who argued that the Blockchain must respond to the principle and interests of the community and that it is the majority of the community that decides the possible evolutions and characteristics that it must have were positioned. And that, based on this principle, if the majority of the community wishes, the Blockchain can be modified.
Others positioned themselves with the idea that the Blockchain must not be modified and must be protected without exception from any form of manipulation.
The decision was voted on by the Ethereum community, where anyone holding ETH was able to vote with a transaction. The decision to fork to recover the funds got more than 85% of the valid votes. However, this decision is debatable for several reasons related to the weight of the vote made:
Turnout was extremely low.
A large part of Ethereum holders did not know that the vote took place.
Therefore, when a new blockchain was created with this theft issue resolved, many chose to continue operating on the original version of the Blockchain, resulting from this process two new networks and currencies.
Ethereum Classic (ETC): is based on the original protocol and is led by a collective that tries to stay true to the original version.
Ethereum (ETH): supervised and promoted by the Ethereum Foundation leads the development of the platform.
With the change scheduled by the Ethereum network of the system from Proof of Work (PoW) to Proof of Stake (PoS) a group of miners successfully forked to keep the blockchain running with the consensus algorithm of Ethereum as it was. This gave birth to a new network and cryptocurrency Ethereum Proof of Work (ETHW).
They position themselves as "the original Ethereum Proof of Work, developed and run by the community". However, if we are rigorous, the original would be Ethereum Classic.
The reality is that ETHW is not doing well today as almost all the miners migrated to ETC. Although it is less than a year old, it does not seem to consolidate.
ETH could not be said to have turned out entirely well either, because, despite the fact that it continued to receive the support of almost all of its community in the move to PoS, it is facing problems of excessive centralization. As I mentioned before, only two addresses control almost 50% of the validator nodes, but also only 5 centralized entities control 60% of staked ETH.
Undoubtedly, PoS leads to the centralization of Ethereum, favoring those who have a greater number of tokens. In the case of Ethereum to become a node validator it is necessary to block 32 ETH, a high amount for most users.
And the PoS system is already taking its toll since the number of validator nodes that comply with the regulations of the Office of Foreign Assets Control of the United States of America (OFAC Compliance) is currently 72% and continues to increase. This means that these nodes block transactions that do not comply with OFAC regulations or prohibitions, breaking resistance to censorship.
From Dennis Parker Twitter
From the hand of Vitalik Buterin, a new road map has been launched with a view to mitigating the path of centralization that Ethereum has been traveling. However, development timelines are slow and the history of delays in implementing updates to ETH is well known.
Although the innovations of this blockchain are evident, so is the centralization and history of decisions that affect the immutability and resistance to censorship of the network. However, large companies and the global economic establishment love the regulations and conditions that benefit them and this can be a turning point for them to decide to invest in ETH and the path of centralization that it travels.
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*Originally posted in Hive