Fusion is coming and will adversely destabilize the system. Recently, Ethereum announced that it will transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) between September 6th and September 20th, 2022 and announced the transition “Merge” called.
The merger will send powerful waves into the area. Ethereum (Eth) mining is valued at $19 billion and Merge is expected to put an immediate end to the entire sector.
There is a lot of enthusiasm, but blockchain activists are concerned about the event. They believe that PoS-based merging will be the final nail in the coffin of “network decentralization” and will inevitably lead to centralization.
The PoS mechanism prioritizes entities with more tokens than those with fewer tokens. This means that larger investors have higher profit margins and, as a logical approach, would keep their coins to increase production capacity. Therefore, a larger stakeholder develops faster than a smaller one. The cost of participating in mining operations would eventually become prohibitive, driving out small partners and leading to centralization.
The better a network or ecosystem, the more decentralized it is. A system resembles a Web 2.0 database when it is too centralized. In addition, those responsible for centralized networks, whether cartel or individual, have the ability to manipulate them.
How corporations control Eth
Due to its decentralized blockchain technology and the second largest market capitalization, Ethereum allows anyone to set up a node and participate in the operation of the network.
Ethereum network Users often host their nodes using cloud computing services. According to data from Ethernodes.org, almost 62% of all nodes in the Ethereum network use hosting services like Amazon. Currently, 10% of Ethereum nodes are hosted by Hetzner, which is currently used by 14% of those hosted nodes.
In addition, 34.7% of nodes run in residential environments. Over 50% of residential nodes connect to just a few US ISPs, including Comcast, Verizon Spectrum, and AT&T.
Therefore, the data provided above shows that of all Ethereum nodes on the mainnet, almost 50% are supported by Amazon, Comcast, Verizon, AT&T, and Spectrum, which conveniently matches the Etherscan statistic of ~49% of Eths US network distribution.
Centralization leads to censorship
At the beginning of August 2022, the U.S. government announced a ban on Tornado Cash, a service that helps some cryptocurrency holders protect their anonymity by encrypting information paths on the blockchain. The government argued that the platform played a leading role in money laundering worth US$7 billion.
However, many in the cryptocurrency community have slammed the decision, seeing it as an overstatement by the government that violates its core principles of privacy and autonomy.
Last week, Hetzner Online, a German data center, said it was not allowed to use its hosting services for cryptocurrency mining applications. In a Reddit thread, the company explained that its ban on mining-related uses includes both Proof-of-Stake (PoS) and Proof-of-Work (PoW) applications.
With 16.0% of Ethereum’s validator nodes now hosted on Hetzner’s servers, the company’s stance on PoS applications could have major consequences for the Ethereum ecosystem.
These cases give us a clue to the problem of centralization and the overarching control that the government exercises over it.
Once Ethereum migrates to proof-of-stake, it turns out that all of these proof-of-stake validators—Binance, Coinbase, Huobi, Bitcoin Suisse, Bitstamp, Blox Staking, and others—could easily be centralized and regulated.
Currently, over 66% of beacon chain validators are required to adhere to the regulations and compliance of OFAC – Office of Foreign Assets Control, a financial intelligence and enforcement agency of the US Treasury Department. So we have a situation where there can be potential 51 Majority Attack on the Ethereum at the protocol level where the government can regulate and control the entire blockchain.
The government can issue directives to these validators, which are now large corporations, not to process blockchain transactions that involve specific addresses or that interact with Tornado cash or any type of protocol they choose.