What does the data tell you about how decentralized the Ethereum 2.0 pledge is?

Behind the original title: "Nansen | data: the etheric lane 2.0 will bring change?"

By PNG Young Loon, Analyst at Nansen

Translation: Mike Jin

Interest in pledging Ethereum 2.0 continues to rise among retail and institutional users, with every deposit they make pushing Ethereum 2.0 toward or away from decentralization.    

What is Ethereum 2.0?

Ethereum 2.0 is a series of upgrades with different transition times. It's best seen as a process of trying to scale Up Ethereum while remaining secure, decentralized, and sustainable.

Key milestones for Ethereum 2.0 to date include:

The launch of the beacon chain, which went live in December 2020.

The incorporation of the beacon chain into the mainnet marks Ethereum's transition from a proof of work (PoW) to a consensus mechanism for obtaining proof of sale (PoS).

Sharding chain implementation will take place sometime in 2022.

The PoS blockchain is designed to be more decentralized. In a proof of work, the user will need computing resources (and some technical capability) to generate blocks and validate transactions. In the proof of interest, anyone who has ETH above the threshold level can participate in the process. This encourages more nodes to validate transactions on the Ethereum network, leading to a lower risk of attack by most people.

Deposit contracts for Ethereum 2.0 have been available since November. Ethereum addresses intending to participate in the Ethereum pledge must be placed on at least 32 ETH, which will be locked until the Beacon chain is consolidated. This creates obstacles for those who own less than 32 ETH or who prefer to hold liquid assets. Therefore, some users may prefer Staking through centralized exchanges like Binance and Kraken, or liquidity Staking agreements like PDO and Ankr.

Decentralization of Ethereum pledge

While centralized entities like Kraken and Binance continue to account for a significant share of Ethereum 2.0 pledges, they appear to be losing their share to PDO Finance and non-entity alternative pledge solutions. Just recently, the top four entities (PDO, Kraken, Binance, Staked. Us) had a combined share of about 36.6 per cent in deposit contracts.

The Satoshi Nakamoto coefficient, a statistic used to quantify the degree of decentralization in various blockchains, represents the number of operators that can colluded to attack the network.

Assuming a 34% threshold, given that PDO has nine Ethereum nodes, today it's estimated to have 12. Assuming a 51% threshold, the number should be much larger.

Nonetheless, the rise of PDO marks a huge improvement in the distribution of control on the web. On March 1, 2021, Kraken (14%), Staked. Us (8.2%) and Binance (12.9%) jointly control more than 34% of the total shares.

The Herfindahl-Hirschman index (HHI) is used by Vitapk together with satoshi Nakamoto coefficient to measure decentralization. We can calculate HHI by squaring each source address's share of total Ethereum 2.0 shares and adding the resulting numbers.

While obviously not all deposit addresses are independent, this trend does indicate a gradual decrease in HHI over time. Still, it's important to remind yourself that the risks of centralization exist at every layer of the blockchain technology stack. More than 21% of Ethereum nodes are running on Amazon Web Services, according to Ethernodes.

Analysis of deposit activities

Pledge interest in Ethereum 2.0 surged during November 2020, peaking at 4,788 daily deposits, before peaking in early 2021. In the first quarter of 2021, daily deposits never peaked above 1,500. In May 2021, activity began to heat up.

What's odd about the deposit activity is that it's irregular and doesn't seem to correlate at all with the price of Ethereum. Deposits started falling on May 5, just as Ethereum was edging closer to its high of $4,000. Then from May 15 to June, the deposits picked up significantly as the value of Ethereum continued to rise.

In June, ethereum's value almost halved. Then we saw strange spikes in deposits on different days in June.

Shred the data by week and hour (UTC) and you might find one or two things about the geographic concentration of ETH 2.0 pledges. The unevenness of distribution deserves careful study.

conclusion

Ethereum 2.0 represents a clear change in the ethereum security and economic model, with multiple implications that could change the behavior of participants. First, Ethereum turns into an inherently revenue-generating asset. For example, PDO offers an annual interest rate of 5.4 percent on collateralized Ethereum, much higher than the rates offered by money markets like Compound and Aave.

As retail and institutional interest in Ethereum 2.0 continues to rise, there has been controversy over the centralization of ethereum bets around wAS-a-service providers and custodians. This is no small problem, as equity concentration in large vendors can destabilize the network and incentivize bad behavior among nodes. Non-technical users should and must factor this into their decisions when choosing a supplier. Every deposit pushes the blockchain toward or away from decentralization.

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