Concerns about Ethereum

Summary:

• PoS is suffering from greenwashing
• PoS Ethereum looks like it may be very centralised
• There’s a big opportunity for alternate L1s

PoS is suffering from greenwashing

The over-simplified argument in crypto is that Bitcoin is bad for the environment because it uses so much energy, and that proof of stake (whether via the Ethereum Beacon chain or other layer 1s) provides a solution to that.

There are a small number of people I’ve listened to now that are smart and have a non-consensus view that there are significant security and centralisation risks with Proof of Stake. In particular, Ethan Buchman a founder of Cosmos (I highly recommend this Bankless podcast) and also John Fletcher and Ying Chan of Cambridge Cryptographic.

My point overall is not that PoS should be stopped or avoided — indeed I am building on PoS chains. Rather, I’m saying that — on the margin — in public and crypto (except Bitcoin maximalist circles), PoS is overrated and it is important to have alternatives.

PoS Ethereum looks like it will be very centralised

It is already possible to stake ethereum in advance of the merge between ethereum today and the proof-of-stake Beacon chain.

• 33% of staked ethereum is currently through one provider — LIDO.
• In a PoS network, a player with 33% of staked tokens can stall the network. With 66% it’s possible to attack the network.
• There are other big centralised players like Coinbase that also provide staking.
• It’s pretty hard to stake by oneself because a minimum of 32 Eth are required.
• Note: If you are staking, for the good of the network, I recommend a decentralised provider like Rocket.

Right now, there are about 12.5M Eth staked on the Beacon chain, out of a circulating supply of 120M Eth. It’s possible, after the merge with the Beacon chain (the PoS chain), that people stake themselves. That seems unlikely. My first order guess is that LIDO won’t keep a 33% share, but it seems likely that the top three centralised platforms together would account for a 33% share. (BTW, Bitcoin mining is also centralised among pools).

Side-note: It’s an interesting question to ask why this hasn’t happened in other L1s. My guess is that LIDO prioritised the biggest chain, and this dynamic will play out on other chains.

There’s a big opportunity for alternate L1s

As Ethan of Cosmos says, it’s important that there be strong alternatives to Ethereum. My current understanding is that there aren’t great alternatives because other L1s are largely PoS (and face similar risks) plus they have (or will have) the further downsides of:

1. Less economic value locked and supporting security
2. Fewer full nodes verifying blocks
3. Fewer validators/miners (resulting in issues with downtime on some chains like Solana, plus posing centralisation risks)

There is a view (not quite Vitalik’s view, but well articulated by him here) of PoS that decentralising PoS staking is somewhat hopeless and it’s better to focus on having more decentralised nodes that check the validators are honest. A key issue here is that full-nodes are quite heavy on a lot of blockchains, so it’s not all that practical for many people to run them (hence why most developers are using Infura and Alchemy. Many L1s may have high transaction throughput, but their nodes take a ton of computing power to run:

From Vitalik’s End-game

So, I see a huge opportunity for L1s, but they need to:

1. Credibly figure out how to incentivise lots of full nodes (which probably includes making them smaller)
2. Spend time thinking whether there are ways to get away from centralising forces for staking

This is pretty hard for L1s to do because they take pride in having low transaction costs. I think this is a losing game because that ultimately reduces their property of censorship resistance, which is the core benefit of doing crypto. My hope is that this crypto crash pushes L1s that are not decentralised towards either a) dropping the premise and being tradfi or b) innovating to provide a strong alternative to Ethereum.

P.S. I have a reasonable (although not deeply technical) understanding of Bitcoin, Ethereum and Celo. No doubt other chains include features to address some of my concerns above, and I need to learn more about them. Please comment with specific reading recommendations.