Decentralization isn’t a spectrum. It is one side of a sliding scale. And in crypto, finding an objective middle that distinguishes between centralized and decentralized projects is close to impossible.
It is a subjective endeavor where projects can only measure their degree of decentralization or centralization in relation to each other. And because this measurement is essential to communicating how resistant a blockchain is against censorship and attacks, centralization accusations from competing projects are a common and persistent occurrence.
It is no surprise, then, that the debate on Ethereum decentralization surged after its transition to proof-of-stake. After such a major event, investors and builders across the crypto community were motivated to defend the decentralization ranking of their consensus protocol.
Read more: Proof-of-Work vs. Proof-of-Stake: What’s the Difference?
We spoke with the experts at Figment, a leading institutional staking service provider, to separate the signal from the noise in this debate. Instead of asking the black-and-white question of, “Is Ethereum now centralized?,” we asked how the network now compares to the rest of the industry. In short, Figment has reported that a deep analysis of on-chain metrics indicates that Ethereum decentralization has increased since the Merge.
A thorough examination of this data will address the concerns and accusations from competing chains.
Ethereum decentralization — can only three entities halt the blockchain?
Only hours after Ethereum’s successful Merge to proof-of-stake (POS), various critics propagated a rumor that just three entities now have the power to halt the chain. This alarming accusation was quickly refuted with a closer examination of the stakers in question. Figment’s research team explained that some of these entities are composed of several or dozens of independent operators. Take Lido, for example.
Lido represents the largest entity on Ethereum by stake. At the time of publication, more than $5 billion worth of ETH is staked on Lido. Although that seems like a lot of Ethereum in one place, Lido is composed of about 30 independent operators — Figment being one of them. Additionally, the cumulative deposits have grown to over 4,000,000 ETH, and the number of Lido’s unique depositors has increased to over 90,000 depositors as of Oct. 16.
Lido unique depositors and Lido cumulative deposits Source: Dune
Validators also understand the threat that decentralization poses to Ethereum. It has been a contested topic, especially since 2018, when former SEC Director Bill Hinman gave his thoughts. In short, he made a statement that alluded to how a digital asset trumps the Howey test. He assessed that an investment contract would no longer exist if a crypto asset or DeFi platform were sufficiently decentralized.
The key to passing this test was that a platform or protocol would no longer require the promoter or original operator to perform “entrepreneurial efforts.” If that key moment happened, then the “information asymmetries between that enterprise and its investors might diminish to the point where the protections of the securities laws were no longer necessary.”
Regulators tend to agree today that blockchains fall along this scale of centralization to decentralization. They, like the competing protocols, cannot agree on the exact degree to which a project achieves an exemption from security laws enforcement.
Regardless of where they settle, core Ethereum developers continue to make efforts and commitments to further decentralization. Since April 2022, Ethereum’s decentralization level has risen by 50%.
Conclusion
As one of the most heated conversations in crypto, talk surrounding the true decentralization of digital assets will continue. It will come in many shapes and sizes — comparing the decentralization of proof-of-stake vs. proof-of-work,or talking about how decentralized Ethereum is becoming in general. While it’s challenging to provide an objective black-and-white answer, the increasing number of validator participation, unique Lido operators and depositors, and protocol upgrades paint a more decentralized network after the Merge.
This content is sponsored by Figment.
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