The Evolution of Ethereum Decentralization
Since its launch in 2015, the Ethereum blockchain has transformed to become more decentralized. In this article, Kseniya Lifanova dives into the significant events that occurred along Ethereum’s path to decentralization.
Authored by VP of Decentralized Strategy & Engineering Kseniya Lifanova.
The evolution of Ethereum and its path to greater decentralization has been a topic of significant interest since its launch in 2015. Over the years, Ethereum has undergone significant changes to become more decentralized — from the Beacon chain launch in 2020 and the highly anticipated Merge in September of 2022, to the Shapella upgrade in April 2023, which went through without a glitch. While many were concerned we would see a huge outflow of ETH, the upgrade opened the doors for more investors to stake their ETH, and we’re seeing significantly more inflows since the upgrade.
With these major events alone, it’s clear decentralization is a journey. Let’s discuss the early days of Ethereum and look at miner statistics, review where we are today, and dissect some of the common concerns around centralization. We’ll also highlight areas of opportunity for making a more resilient system and how we think about the future.
In The Beginning
A computer that could simultaneously live in all the nodes of an enormous global network, which would be able to process anything you threw at it, without downtime or interference, so developers could build whatever they dreamed of, and nobody would be able to stop them or their applications. Like an infinite machine. — Camila Russo, The Infinite Machine
When the Ethereum blockchain launched in 2015 as a proof-of-work chain, Vitalik Buterin was already thinking about proof-of-stake. In 2013, he wrote “What Proof of Stake is and Why it Matters” in which he argued that while PoW was the only option in 2009, we could now design protocols that build off the cryptocurrency itself — and PoS is an excellent example. In the article, Vitalik highlights some of the advantages of PoS over PoW, such as lower energy consumption and reduced centralization, and asks, “Does PoS have a future?” Today, the answer is obvious — YES.
While there is a lot of content on the differences between PoW and PoS, let’s review some of the more compelling reasons for using a PoS consensus mechanism.
PoS: Energy, Accessibility, and Revenue Generation
PoS offers better energy efficiency as you do not need to perform complex computations. Instead, validators stake capital as a form of collateral that can be lost if the validator behaves dishonestly or lazily. In turn, this lowers barriers to entry. You no longer need to purchase complicated hardware that needs to be replaced every few years. However, you will need a computer, an internet connection, and 32 ETH. This allows more participation and revenue generation for a larger group of people. These reasons alone encourage a more decentralized system.
With all of this in mind, Vitalik Buterin and the Ethereum developers started work on PoS implementation while launching the PoW chain. The first version of the PoS chain was introduced in 2017, and after years of iteration and refinement, Ethereum 2.0 was officially launched in 2020.
Ethereum 2.0 rolled out the Beacon chain, which ran alongside the PoW chain. The long-awaited Merge finally happened in September 2022, when Ethereum fully transitioned to the PoS chain. These were huge steps in Ethereum’s path toward decentralization.
Since the launch of the Beacon chain, many of the conversations within the Ethereum ecosystem have been centered around validators — how many are live, who is deploying them, and how much ETH is staked on them. These types of conversations didn’t occur with the PoW chain, so for comparison, let’s look at statistics around ETH miners and see what story the data tells.
ETH Mining: The Data
A June 2020 report by Consensys, in collaboration with the Codefi Data team, analyzed the performance of PoW mining on the network from 2015–2020. Let’s look at some of the graphs and data points that highlight the centralization that occurred within Ethereum mining:
ETH Miners: Power Consolidation
The graph below shows miners and miner payout addresses per month from 2016 to 2021. You’ll see that the number of miners significantly drops from 2016 to 2017 (orange line) and then remains somewhat flat. Meanwhile, the number of miner payout addresses (blue line) climbs quickly through the end of 2017.
In Figures 3 and 4 below, we see that the percentage of blocks mined by mining pools increases from 70% in 2016 to 90% in late 2017, and block rewards attributed to mining pools increased from 71% to 97% in those same years.
The sharp drop in miners in the first graph, along with a drastic increase in mining pool influence in terms of block production and rewards, points to a considerable consolidation of power in 2017.
ETH Miners: Flow of Funds
Below is a Sankey diagram that shows the flow of funds originating from the largest mining pools between Jan 2017 and Jan 2020. The eight largest mining pools are in the blue on the left, and they show that despite years of payout transactions, these mining pools share a subset of eight addresses to which they send over 200k ETH. This is evidence that even within mining pools, customer centralization could be significant.
Now that we have looked at ETH miners, let’s look at ETH validators.
ETH Validators: Current Market
As of July 2023, there are 738k validators deployed, with 24.6 million ETH deposited. That’s 20% of the ETH supply.
When looking at the breakdown of the 768k validators, we see that 244k of these validators are staked through Lido, taking up 31.7% of the market share. Coinbase and Binance come in second and third with 74k and 39k validators — market shares of 9.6% and 5%, respectively.
Diving further into market shares, in total, staking-as-service providers account for 72% of staked ETH as of December 2022.
At face value, these percentages might seem alarming. It doesn’t look like we’ve made great strides in decentralizing the network as one entity takes up a third of the ETH staked market share. However, as this report outlines, it’s important to consider additional nuances when evaluating ETH staking. If we dig a little deeper, we’ll find that centralization across staking providers is less of a concern, and in fact, infrastructure is where we see the biggest threat.
Let’s take a closer look at the entity with the highest market share of staked ETH — Lido.
ETH Validators: Lido
Today, Lido has 29 whitelisted node operators that are voted in by the Lido DAO, and all the node operators are professional organizations. Even though Lido represents 244k validators, no single entity controls more than ~5% of Lido’s staked ETH or ~1.5% of all the ETH validators. Lido has just closed another wave of applications where 100+ additional node operators applied. This will decentralize the stake within the Lido ecosystem even more.
One of the main concerns of centralization within a blockchain is the risk of a 51% attack and for this to happen, all of the Lido node operators and two other major node operators would need to collude. The chances of this happening are quite small.
Although Lido represents 30% of staked ETH, the stake is spread across 29 node operators that do not control more than 1.5% of all ETH validators.
Another important statistic to evaluate is the geographical distribution of nodes. A wider distribution of nodes prevents any country or government from abusing its power to try and shut down the network in its territory. If a majority of nodes were deployed in one country and the government decided to shut down the nodes, that would be a huge disruption to the network. Today, we have 51% of detected nodes running in the US and 17% in Germany. There is an opportunity here to decentralize further.
And now we get to the most important statistic of them all: Infrastructure.
ETH Validators: Infrastructure
To start, we see centralization in clients, with Geth representing 76% of execution clients and Prysm representing consensus clients. Secondly, and more importantly, we look at where nodes are hosted and we see that roughly 50% of validator nodes are deployed in AWS, and 70% of all nodes hosted are using a cloud provider.
With Ethereum, 50% of validators are using the services of a cloud provider owned by one of the largest and most powerful centralized organizations in the world.
This seems antithetical to the point of what we are all trying to accomplish.
Now that we’ve looked at some of the risks associated with the current market, let’s look at the opportunities. Whether you’re an individual node operator running a validator from home or a large operator with thousands of validators, you can help further Ethereum’s decentralization.
What’s needed to further Ethereum decentralization?
We need more node operators.
Going from five pools controlling half of the ETH staked to several pools and node operators will help the network’s evolution. At Foundry, we recently launched our ETH Staking solutions, but it can’t just be us — we need greater diversity and more optionality for people to stake their ETH.
Many of us envision a utopian world where everyone is running their own ETH node, but for now, we need to support the institutional clients that want to stake their digital assets.
It’s easy enough to run one validator, but what about when you need to spin up 1,000 validators at once?
We need more people to get onto their own hardware.
Decreasing our dependence on AWS and other centralized cloud providers, and deploying nodes on our own hardware will help us further decentralize the network.
Last fall, Hetzner, a data center operator hosting 15% of ETH nodes (at the time), shut down the ability to use their servers for staking or mining. This is the risk you take by depending on cloud providers — you never know when they are going to pull the plug.
At Foundry, we deploy our ETH validators on bare-metal machines that we own and control.
And this applies to all of you solo-stakers as well.
We need to embrace distributed validator technology.
DVT is a decentralized, open-source protocol that allows the duties of a validator to be distributed among multiple nodes, as opposed to a single machine. This technology alleviates some of the risks that come with running validators for individual node operators, all the way up to the large node operators.
Individual node operators run the risk of machines missing rewards, and it’s rare to have a failover machine set up at home. By distributing validators across a cluster of nodes, they can mitigate this risk.
Larger node operators will typically have automated scripts that redeploy validators in a failover environment. This introduces a risk of having two nodes signing from the same validator address, which could lead to slashing. By adding redundancy through DVT nodes, a large node operator is adding redundancy to their infrastructure.
To learn more about DVT technology, listen to the latest Foundry Decentralized podcast episode covering how SSV and DVT offer a vital infrastructure solution, bolstering the decentralization and security of Ethereum validators.
The Evolution Continues
Ethereum has come a long way since its inception in 2015, and its evolution toward greater decentralization has been a significant milestone in its journey. Through the various upgrades it has made, the platform has continued to push the boundaries of what’s possible in the world of decentralized applications and smart contracts. As the Ethereum community looks toward the future, decentralization will continue to be a guiding principle, as the platform seeks to create a more secure and equitable world for all.
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