Blockchain protocols exist, at least in part, to try and solve the problem of determining representation in majority decision making.
The first approach to blockchain protocols is Bitcoin, which, in the same spirit as Ethereum 1, uses a proof-of-work model. The original whitepaper makes it clear that a guiding motivation behind proof-of-work was the democratisation of voting power:
“The proof-of-work also solves the problem of determining representation in majority decision making. If the majority were based on one-IP-address-one-vote, it could be subverted by anyone able to allocate many IPs. Proof-of-work is essentially one-CPU-one-vote.” — Bitcoin Whitepaper
12 years later however, it’s clear that proof-of-work has failed to meet this objective.
Distribution of the blocks mined in the Bitcoin and Ethereum blockchains. Mining is dominated by few major miners, typically mining pools, numbered from 1 to 10 and a great number of minor players in the “Unknown/other” category. Source: blockchain.com and etherscan.io, 5 March 2019.
It’s now common knowledge that, in both Bitcoin and Ethereum, the vast majority of mining resources is concentrated in a small number of mining pools in which individual miners join forces to reduce the variance of their payments.
Ethereum 2 has chosen to move away from a proof-of-work model to a proof-of-stake model in part to try and address this problem.
But what prevents staking pools, managed by exchanges, from posing a similar risk to the centralisation of power at the chain consensus level?
The answer is very little.
While we are optimistic about a world in which the user experience of running one’s own node is seamless (a cause we have been dedicated to since 2017), that future is not today.
The psychological bias of loss aversion — in general, people prefer avoiding losses to acquiring gains — combined with the high (32 ETH) minimum staking requirement, and the perceived difficulty and risks associated with running your own staking setup, are all set to have a centralising effect.
Nor is it clear that the in-protocol anti-correlation penalties will achieve their intended goal of assuring a minimum level of decentralisation (from what we’ve seen so far, most people do not reason well about these sorts of tail-risks).
In sum, even though the initial distribution looks encouraging, there isn’t much preventing signing power from concentrating amongst a handful of exchanges. Their value proposition — the ability to earn interest on one’s coins without running a node — is something that many will no doubt find attractive. This is especially true if we build and market tools that make it easy for them to offer free staking.
Apart from the philosophical ugliness of such an outcome, it does not bode well for Ethereum’s future as a censorship resistant system. In particular, it increases Ethereum’s vulnerability to coercion by state actors.
In a world in which Ethereum becomes the engine for a new global and decentralised financial system, it would be naive not to expect governments to apply pressure on these exchanges, force them to censor certain transactions; and perhaps even coerce them into attacking the network itself (should Ethereum be deemed too great a threat to the powers that be).
The good news, however, is that this scenario is not inevitable. There is still time for us to help bring about a world in which the pools that users decide to stake with are protected by community members with incorruptible principles, rather than profit-driven exchanges.
They can kill us but they can’t kill a DAO — Suji Yan
In our vision, this takes the form of a DAO. A DAO that helps match a self-custodial pool of validators with a decentralised pool of stakers. A DAO that ensures validators are kept honest, while allowing those with less than 32 ETH to participate. A DAO whose keys are guarded by community members who have proven their unwavering commitment to Ethereum’s principles of openness and censorship resistance.
Ethereum’s Proof-of-Stake FAQ states that:
the centralization balance is an empirical question for which the answer is unclear until the system is actually running for a substantial period of time.
And while this may be true, we, the Ethereum community, still have some agency in swaying this balance.
In particular, to increase the likelihood that the decentralised outcomes we seek to achieve are actually achieved, we need to build, and communicate the importance of alternatives to exchange managed pools.
If we don’t, we risk creating a system that centralises voting power in much the same way as proof-of-work. One in which the risk of a powerful government exerting their influence, is all too great.
In light of this, we are announcing our commitment to building a validator DAO in the spirit described above. We will be releasing a first attempt at a whitepaper soon. We don’t claim to have all the answers. As such, this draft will be more akin to a living document. One that will evolve with feedback from you all.