Anti-censorship and censorship-accepting, Ethereum may fall into a long-term regulatory dilemma

This article does not have a strict conclusion, but is more for discussion and exchange. Moreover, the things discussed in this article seem to be less popular in the Chinese-speaking world, and I have not conducted rigorous and prudent research, and am limited to information sources collected from public channels.

The most important event in Ethereum recently is the preparation for the Merge, but beneath the iceberg of the Merge, there are actually turbulent waves. Since I often discuss English-speaking KOLs, I have summarized some of the recent major events that are considered to be very important and hidden under the Merge.

Interested readers can delve deeper into the beacon chain’s anti-censorship capabilities.

The United States is pushing for protocol-level reviews

First, let’s go back to two days ago, when the well-known KOL @lex_node broke the news on Twitter that “US validators (including the very powerful Coinbase) will promote protocol-level review.”

The origin of this statement is that more than 66% of Ethereum's validators on the beacon chain will comply with OFAC regulations.

OFAC, the Office of Foreign Assets Control of the US Department of the Treasury, is responsible for administering and enforcing all economic and trade sanctions based on US national security and foreign policy.

In other words, if OFAC needs to impose sanctions on a certain Ethereum account, it is completely possible, just like the current sanctions against t0rnado.

To be more direct, OFAC can theoretically control whether an Ethereum account can conduct transactions such as transfers. Because once your Ethereum account is sanctioned by OFAC, the Ethereum validator node will not execute the corresponding block packaging according to the relevant policy. This means that the corresponding account is disabled at the blockchain level.

Why is blockchain no longer censorship-resistant?

Everyone’s established impression of blockchain is that it has a good anti-censorship mechanism, but why is it that up to now, through a series of judicial cases and sanctions, it can be seen that blockchain does not have a good anti-censorship mechanism.

There are two core points:

• First, as the blockchain industry grows, it is inevitable to meet the corresponding supervision. From the increasing market share of USDC, it can be seen that both institutional investors and individual investors tend to use compliant stablecoins and Web3 protocols.

• Second, U.S. regulators are not only keeping up with the times in terms of technology, but their understanding of blockchain far exceeds that of most industry professionals.

Specifically, blockchains like Ethereum are decentralized and very difficult to regulate. However, after Ethereum promotes Merge, regulators can conduct block/transaction reviews through the beacon chain's validators.

From the current situation, whether it is the current validators on the beacon chain or the validators after the future Merge, they all rely on institutional verification/project verification, such as coinbase, Lido, KRAKEN, BITCOIN SUISSE, etc.

However, such nodes are subject to OFAC regulations and must respond to regulatory policies. In other words, since the validator nodes are affiliated with US agencies, they need to respond to the US government's review of the Ethereum blockchain. And it is at the protocol level, in-depth review of each tx transaction.

So how to deal with it?

Fortunately, Vitalik and the Ethereum Foundation do not want to see Ethereum subject to protocol-level review by the US government, and have been committed to opposing such review in recent times.

In the latest Ethereum community survey on Twitter, Vitalik voted for X, which means "treating censorship as an attack on Ethereum and destroying their node through community consensus."

Of course, Coinbase’s beacon chain staking service builder @LukeYoungblood explained Coinbase’s node operation mechanism in a private manner on Twitter.

But if we look back at OFAC's jurisdiction, it seems that no matter whether the validator is located in or outside the United States, as long as the corporate entity, i.e. Coinbase, is within the scope, it must be subject to regulation.

On the technical side, Vitalik and the Ethereum Foundation have also recently been actively researching the Block Proposer Separation methodology, namely BPS, the block proposer separation scheme.

Those interested in technical solutions can refer to the following information:

https://writings.flashbots.net/writings/why-run-mevboost/

https://ethresear.ch/t/proposer-block-builder-separation-friendly-fee-market-designs/9725

Some well-known KOLs have also asked questions to major pledge institutions through public channels, but have not received any responses so far.

Summarize

I think the impact of Ethereum’s ongoing anti-censorship storm is far greater than that of Merge. Strictly speaking, Merge is just a change in Ethereum’s economic model. But Ethereum’s anti-censorship storm has shaken the foundation of the entire blockchain industry. Once Ethereum’s anti-censorship storm is put on the table, it will inevitably cause a split in blockchain consensus.

One group is mainly composed of American institutions, advocating that the United States should control and censor blockchain. The other group is mainly composed of idealistic developers, committed to blockchain anti-censorship. In the middle, various blockchain-based applications need to take sides in this middle.

Perhaps, a huge battle between anti-censorship and censorship acceptance has begun.