Bankless: Exploring the Centralization Problems and Countermeasures of the Ethereum Ecosystem

Original title: "Bankless: Inventory of the centralization pain points and solutions of Ethereum ecology"

Original source: Bankless

Original compilation: BitpushNews 

The Ethereum ecosystem is more centralized than it needs to be.

We often praise the accessibility of staking, but rarely discuss the large amount of Ether staked on Lido. We support decentralized currencies, but still rely heavily on centralized stablecoin issuers. We penalize L1s for compromising on the principle of decentralization, but we have similar problems in our own scaling solution.

However, there is hope, because in a centralized place, developers usually have solutions. This article will explore Ethereum’s centralization pain points around staking, stablecoins, and rollups, and what is being done to address them.

Staking

Pain point: the security of Ethereum is concentrated on a few platforms

LIDO’s liquid staking derivative (LSD) “stETH” dominates DeFi; the token has the highest liquidity among all staking derivatives, serving as a blue-chip liquid staking Lido stands out among its peers, with Lido controlling 17.6% of Ethereum's TVL. One in three Ethereum validators (30.6%) belong to the protocol, and its staking derivatives have an absolute 74.9% share of the LSD market.

Although many decentralized protocols (such as Rocket Pool) allow anyone Acting as a node operator, but Lido's current V1 version only allows whitelisted operators to run the protocol's validators, pre-approved partners pledge a large amount of ETH is a centralization "hidden danger".

As of Q4 2022, Lido has 29 active Ethereum node operators.

Solution: PoS and withdrawal

Lido is an easy target to compare , but it should be acknowledged that Ethereum’s transition to proof-of-stake consensus (Merge) has contributed to the decentralization of the network.

Lido may control 30.6% of the validator set, however, Bitcoin's largest mining pool operator controls 31.7% of the hash rate. The top 12 BTC miners collectively control 96.1% of the network’s hash power, while the network’s 12 largest stakers hold 70.3% of Ethereum.

PoS serves smaller participants better than PoW systems, Such as separate validators, allowing more participants to be rewarded for securing the network. Like the Merge hard fork before it, Ethereum’s latest network upgrade, Shapella, is a crucial step toward decentralized network security.

Shapella supports withdrawals, and for the first time since the launch of the Beacon chain in December 2020, it provides liquidity for independent stakers and staking pool users to stake ETH. Withdrawals provide options for stakers seeking liquidity: Standalone staking and staking pool solutions are now effective competitors to LSD for stakers looking to maintain liquidity.

Meanwhile, the next-generation staking protocol is trying to give Lido users more reasons to withdraw their funds than ever before. New staking methods (Stakewise V3 and ether.fi) create a competitive market where node operators compete for capital by offering superior staking yields, while LSD-Fi protocols like unshETH are trying to decentralize staking through token incentives .

Stablecoin

Pain point: excessive dependence on centralized stablecoin

Circle's stablecoin came under indiscriminate selling pressure after Circle announced it had $3.3 billion trapped in the failed Silicon Valley bank.

USDC fell to an all-time low of $0.82 on centralized exchanges as liquidity evaporated from on-chain stable swap pools. Maker’s DAI and Frax’s FRAX, both heavily collateralized by USDC, inevitably fell victim and traded at steep discounts during the sell-off.

Thankfully, the market has noticed the danger and has chosen to diversify into USDC, the stablecoin’s market cap is down 30.1% since the March banking crisis!

Unfortunately, the lessons learned leave much to be desired: Instead of vowing to ditch centralized stablecoins, we simply dismissed USDC in favor of Tether's opaque-backed stablecoin USDT. USDT’s market capitalization has been on the rise since the Circle event, up 13.6%, and is approaching the all-time high it reached before the Terra-Luna crash.

Solution: Building the next generation of stablecoins

The extremely limited reserve transparency of centralized platforms is only a stopgap measure, the crypto market should turn to a truly decentralized stablecoin alternative, anti-seizure/confiscation, fully transparent on-chain stability Currency substitutes are the general trend.

While Reflexer's RAI has long been lauded for having these advantages, it has limited reliance on ETH as sole collateral and persistent negative redemption rates Blocking adoption, no one wants to hold a "stablecoin" with a devalued dollar!

HAI is a fork of RAI to be deployed to Optimism in the near future, Aiming to make up for the shortcomings of its predecessor by accepting yield-generating stETH as collateral, the move hopes to turn the redemption rate into a positive one.

At the same time, Berachain's HONEY stablecoin will be mortgaged by various assets mortgaged to the chain's unique liquidity proof consensus layer, which can help HONEY achieve UST-like scalability without the risk of endogenous collateralization.

Rollups

Pain point: Rollups are centralized and lack necessary security

Sequencers (sequencers) sequence L2 transactions and build local chains, which act like validators on Ethereum, but require higher trust assumptions.

While the single ordering model used by most rollups is efficient and offers low gas fees and fast transaction times, they are controlled by a single entity, representing a significant contribution to network liveness Threats and questions about centralization.

Alt-L1 chains other than Bitcoin have long been criticized for sacrificing uptime and decentralization in pursuit of low fees and high TPS. Currently, Ethereum’s scaling experiments have produced similar results and undermined the benefits of transacting on a trustless network.

A brief glance at the "risk" classification of the top ten Ethereum scaling solutions on L2BEAT will reveal that there is a clear gap between L2's current situation and our ideals .

Optimism and forks like Metis Andromeda lack proof of failure, while The leading rollup solution, Arbitrum, only allows whitelisted participants, and without permissionless state verification, malicious sequencers could include bogus transactions.

Additionally, many rollups contracts are upgradable, a feature that allows the owner to change the code (presumably to fix bugs). Unfortunately, updating the battle-tested code resets the Lindy clock and can cause bugs that compromise the integrity of the rollups. The $200 million Nomad bridge attack in August 2022 demonstrated the pitfalls of upgradable contracts.

Solution: implement a decentralized sequencer and continue to build

in each rollup A vague promise to work towards decentralization of the sequencer set can be seen all over the roadmap. The hard part is how! Optimism, for example, lists a “decentralized sequencer” as a goal, but notes that “the precise mechanism for sequencer rotation has not been finalized.”

While the would-be L2 team is privately working on an internal solution to decentralize the sequencer, various exciting external solutions are emerging to address this pain point .

One potential solution gaining traction is "based" sequencing, explained in a March 10 forum thread by ethereum researcher Justin Drake . In this model, L1 block proposers work with searchers and builders to permissionlessly include the next rollup block as part of the L1 block.

based rollup inherits Ethereum's liveness and safety guarantees, but its throughput is limited by L1's transaction ordering and data availability. Additionally, transaction confirmations are bounded by twelve-second block confirmation times, eliminating the fast pre-commits enjoyed by L2 traders like Arbitrum.

Espresso, Astria, and Radius are innovative protocols designed to provide middleware sequencer solutions that allow rollups to access a decentralized network of sequencers while avoiding order-based L1 transaction processing bottleneck.

Shared sequencer layer in addition to scattered sequencer sets Also promises native cross-rollup atomicity and bridge-opt-in rollups into the network, much like Optimism's OP stack "hyperchain" vision. However, any Optimism or zero-knowledge rollups can access these shared sequencers regardless of their construction. Additionally, these solutions can quickly take advantage of EigenLayer restaking to improve capital efficiency and increase sequencer efficiency.

Unfortunately, more time and further development is the only remedy for improving the rollup risk profile in terms of the license-free proof regime and the restrictive nature of rollup contract upgrades measure. The lack of effective fraud proofs and upgradable contracts reflects the reality of the compromises required to scale on Ethereum today.

Vitalik proposed a three-stage taxonomy for classifying rollups according to the number of "training wheels" required. The first stage rollup, the second classification, has a proof-of-work system, and the second stage "no training wheels" rollup eliminates the upgradeability of smart contracts.

Most rollups are still in phase zero. However, clear progress is being made, with Arbitrum recently reaching phase 1 of EVM-compatible rollups, and Vitalik predicting that all rollups will be phase 2 within a year.

Epilogue

If it weren’t for these new developments, Ethereum might not have struggled with these centralization issues Struggling, crypto is at the forefront of permissionless financial innovation, we are still on the road to solving the problem, don't let one or two weird trust assumptions stop you, let them be the catalyst for change innovation, overcoming them not only increases security , and provides new (and potentially hugely profitable) opportunities for users.

The future is bright, the crypto frontier is constantly changing, and despite the shortcomings, we will continue to build.

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