Who Owns Ethereum Now?

It’s been over a week since the Ethereum merger, and the ripples are already starting to show. A report commissioned by the Crypto Carbon Ratings Institute (CCRI) shows that energy usage has dropped, even more than expected. The CCRI report from “Ethereum-centric software company ConsenSys” says Ethereum now uses about 99.99% less energy than before the merger was completed. It also shows that the blockchain’s carbon footprint has also dropped by more than 99.99%,” reads a post on the Decrypto website. Reducing energy usage was one of the main goals of the merger.

However, the proof-of-stake validation mechanism is beginning to reveal its inherent weaknesses, particularly around the very thing that cryptocurrencies were designed to support: decentralization.

Ethereum’s move to Proof-of-Stake has sparked some controversy, with most commentary celebrating improvements to climate impact and the scrutiny that Proof-of-Stake protocols bring to regulatory categories, network security, and the impact on the concentration of influence and decision-making power.

Discussions about centralization, security, and regulation have reached a fever pitch as Ethereum is joining many other established PoS chains such as Cardano, Solana, Tezos, Mina, and Algorand, which all started as PoS layer 1 chains and have built their ecosystems on this model.

Ethereum was built as a PoW chain and is a pioneer in the development of smart contracts and the creation of large-scale, blockchain-based ecosystem activities. Because of the various possibilities it offers for blockchain and cryptocurrency, it has become the largest blockchain with the most activity and a very loyal community.

Due to its previously designed PoW consensus mechanism, it also uses the most energy of all blockchains, second only to Bitcoin. As the world focuses on reducing energy use and dependence on fossil fuels, Ethereum hopes to do its part. But due to Ethereum's scale and its position in the blockchain and crypto space, the impact of its transition to PoS highlights previously unrecognized problems with the model.

PoW vs. PoS: It’s always helpful to have a comparative reference available at any time.

Quick review: Both PoW and PoS consensus mechanisms rely on a reward system that encourages good behavior and discourages bad actors from engaging in activities such as fraud, attacks, and double spending. The PoW mechanism is inherently more decentralized because miners are personally rewarded for solving cryptographic puzzles and ensuring the accurate continuity of the blockchain. The validator who first solves the puzzle and adds another block to the chain is rewarded with Bitcoin.

Proof-of-stake protocols grant validator status to those with the highest investment. This security assumption is based in part on the idea that those with higher stakes are less likely to be bad actors. There are no rewards for mining, but validators receive transaction fees for creating blocks.

It’s not hard to see the problem here of granting validator status to those with the largest financial investment. This model favors centralization as individuals and companies invest more in the protocol to earn more transaction fees, ultimately making it easier for one or two groups to collude and influence the chain.

This might not be a problem if validators were distributed globally and no group was allowed to own more than a certain small share. Unfortunately, this is not the case. Instead, it is a sword that reduces security and increases centralization.

The shift from proof-of-work to proof-of-stake reduces the Nakamoto Coefficient, which is the percentage of colluding groups needed to successfully attack a chain. In proof-of-work, that percentage is 51%. Under proof-of-stake, that number drops dramatically to one-third, according to Leland Lee, one of the developers of the Nakamoto Coefficient.

Then there is the cross-cutting issue of centralization. According to data from blockchain analysis agency Nansen, there are currently five entities holding 64% of Ethereum, of which Lido DAO holds 31%, and the three crypto exchanges Coinbase, Kraken and Binance hold 15%, 8.5% and 6.75% respectively, totaling nearly 30%.

PC: Coin-operated telegraph

In summary, Ethereum's validator pool is mainly in four organizations that hold more than 60% of the shares. Now it is easier for them to collude and attack the chain. The Nakamoto coefficient has dropped from 51% to 33%. More centralized, less secure.

The jury is still out on the long-term impact of this model, but the question is whether the PoS mechanism can preserve the decentralization that blockchains were created to support. Without staking limits and other regulation, we may see most chains go the way of traditional finance.

Source: https://medium.com/coinmonks/who-owns-ethereum-now-the-dark-side-of-proof-of-stake-protocols-4cab9eb47fd0