On September 15 this year, Ethereum’s long-awaited update, the Merge, took place. The Merge, the most significant event in the network’s history, heralds a new era in the crypto world. However, in our opinion, this new era will encounter some pretty big “bears” in its path. We will explain why.
Ethereum is moving towards centralization
In general, the main goal of cryptocurrency and blockchain technology adoption is to achieve maximum decentralization of the economy (or at least personal finances). However, now that Ethereum has switched to Proof-of-Stake (PoS), a situation is brewing where the network, on the contrary, will become too centralized. This also has the potential to censor transactions.
It is no longer Ethereum miners that process transactions and secure the network, but validators and stakers; they have taken over that task now. And in a situation where most of these validators are in the same country, this can cause problems. Just imagine if government agencies could order these validators, such as Coinbase, not to process certain transactions. And here was us thinking censorship is exactly what blockchain technology was supposed to prevent!
Early news of the Ethereum Merge showed that the first symptoms of increased centralization are already showing. In the first 1,000 transaction blocks after the event, 420 were processed by only two parties, Coinbase and Lido. As far as we are concerned, this is a pretty unhealthy situation, given the example of censorship above.
Only seven businesses represent two-thirds of the total share, meaning that two-thirds of all ETH tied to the network for its control and protection is owned by seven parties. That said, the goal is to have as many different parties worldwide own a share of the network as possible. Only then are we talking about a trusted network where no one can determine whether a transaction is allowed or not.
Ethereum’s big issue
A novice crypto investor might think: so where’s the issue? But it’s definitely there because the whole idea of cryptocurrencies, which started with the birth of bitcoin, basically relies on the ability to do business over the Internet without trusting funds to intermediaries. What would you choose — would you prefer to hand a $100 bill to the recipient yourself, or would you be okay with having your downstairs neighbor (who you barely know) do the transaction for you?
This indeed does not herald the end of Ethereum, and given the current price of ether, it’s also not something investors are worried about right now. Nevertheless, there are positives to the update, mainly that ether issuance has decreased, so it’s worth keeping a close eye on further developments. Ultimately, it is up to the Ethereum community (stakers, developers, etc.) to decide how serious the centralization issue is, whether they see it as a problem at all, and, if so, how it should be addressed.
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