Ethereum’s Elephant; Part 1/2

Six men were once called upon to touch an elephant, one part each, and relay what they touched. Wall, snake, spear, tree, fan, rope… were their final results as they argued, each convinced their fragment defines the whole. The same has been true for Ethereum. But what is going on?

For a little while now, there has been a growing consensus as regards Ethereum and its future. Most feel that the Network is coming to its end, that it has lived to its fullest. Crypto Potato recently asked if Ethereum had sacrificed mainstream adoption for decentralization. So many don’t realize the ways this has played out in the network, some believe it holds dire consequences, others that the network is coming to an end. These and many more will be explored in this three-part essay.

This three-part essay will be looking at these concerns, everything there is to know about them and see if there is any credence to them. Think of these essays as different parts of the elephant in the room. Hopefully, we see the bigger picture at the end and address the elephant in the room.

Problem one: Centralized L2s:

For part number one, we will be looking at the innovation that has catapulted the scalability of Ethereum. Layer 2 (L2) in Ethereum arose from the inherent limitations of the base layer (L1) and the relentless pursuit of scalability by the community. While challenges like centralization remain, Layer 2 is now an integral part of the Ethereum ecosystem, enabling faster, cheaper, and more accessible blockchain applications. Rollups achieved this by relying on sequencers, entities that package and submit transactions to L1. Rollups arrived in the late 2010s, offering a breakthrough. They handle transactions off-chain, batching them into single “proofs” submitted to the mainnet (L1) for finality, significantly increasing TPS and reducing fees. A small number of powerful sequencers emerged which brought about concerns about their potential influence and single points of failure. Centralization!

The emergence of centralized layers in Ethereum is a complex issue with multiple contributing factors. While the core of Ethereum strives for decentralization, various aspects of its ecosystem have incorporated centrality.

It may seem abstract/idealistic to talk about this centralization, however, with the examples listed below, you would begin to have a sense of the centralization within the Ethereum layers.

1. Layer 1 (Consensus Layer):

• Staking Pool Concentration: While the switch to Proof-of-Stake (PoS) increased accessibility to participate in consensus, it also led to centralization concerns. A few large staking pools (e.g., Lido) hold a significant portion of staked ETH, potentially giving them disproportionate influence. (More on Lido later)
• MEV-Boost Relays: Transaction ordering on Layer 1 is influenced by specialized services called relays. A small number of these relays currently play a major role, raising concerns about potential manipulation and censorship of transactions.

2. Layer 2 (Execution & Rollups):

• Sequencers in Rollups: Layer 2 rollups like Optimism and Arbitrum rely on centralized sequencers to package and submit transactions to Layer 1. This dependence on a limited number of operators introduces a single point of failure and censorship risk.
• Dominant Clients: While multiple clients exist for running Ethereum nodes, Geth enjoys a high market share, potentially creating a vulnerability should it be compromised.

Reasons for Centralization:

While it is easy to jump to conclusion and berate industry players for their choice to skirt centralization, technical trade-offs (centralized sequencers in rollups enable faster and cheaper transactions), network effects (early movers and established players can gain a significant advantage), and regulatory uncertainty (fear of regulatory risks can discourage smaller players from entering the market) are some of the reasons it has been considered. The two latter reasons are circumstantial, they happened because not enough engaged with the network at its inception. Regardless, the reasons are not enough justification because if it continues, the network and the wider industry will continue to lose its decentralization allure. What is Ethereum doing as regards these concerns?

The Ethereum community is actively working on solutions to mitigate centralization risks. However, more is needed to note their solutions. Stakeholders must be proactive in engaging with the solutions Ethereum is putting forward. Some questions stakeholders can ask are attached to the solutions listed below.

• Promoting Decentralized Staking Services: Encouraging smaller staking pools and distributed validator setups. How is this shaping up? How are smaller staking pools encouraged?
• Developing Decentralized Relays: Exploring alternative mechanisms for transaction ordering on Layer 1. What alternatives are there?
• Diversifying Clients: Encouraging the development and adoption of alternative Ethereum clients. How easy are they to install and manage?
• Decentralized Sequencer Protocols: Researching and implementing protocols for more decentralized sequencer selection in rollups.
• Decentralized L2s: Yes, many current L2s like Optimism and zkRollups have elements of centralization, primarily in sequencers and validators. Developers are actively working on decentralizing existing L2s (e.g., Optimism’s decentralized sequencer) and creating fully decentralized alternatives like StarkNet and Immutable X.
• Trustless Rollups:
• While some zkRollups like Aztec are aiming for trustlessness, complete trustlessness for all rollups and aspects (e.g., setup vs. ongoing transactions) is still evolving and likely not yet fully achieved.
• It’s crucial to understand the specific trust assumptions of each roll-up for informed decision-making.
• Centralized Node Hosting:
• Reliance on centralized services for hosting Ethereum nodes weakens the network’s censorship resistance and decentralization. Diversifying node hosting across providers would be ideal.
• Decentralized node hosting solutions like Infura and Alchemy are also becoming popular, and the Ethereum roadmap aims to improve base layer scalability, potentially reducing reliance on centralized L2s in the future.

Photo by Zoltan Tasi on Unsplash

So while being worried about the future of the platform, stakeholders can stay informed about ongoing developments, critically evaluate solutions and their trust assumptions, and diversify their activities within the ecosystem. All these are crucial for informed participation. Stay informed, evaluate information critically, and make decisions based on your risk tolerance and goals.

So we have carefully concluded how the emergence and centralization of Ethereum’s L2 is just one part of the elephant in the room. In the next essay, we will move on to the next part, Lido. The elephant should have taken more structure by then because these problems share a common theme, hence feeding into each other. These problems are interrelated, which helps because these are some of the problems the space is facing especially its increasing mainstream adoption i.e. blockchain trilema problem. Any attempt to solve these “ethereum” problems, translates to solving bigger/wider problems.