Concerns about the centralization risk after Ethereum switches to POS

1. A common misunderstanding at present is that if Lido’s staked ETH exceeds 51%, there will be centralization risks.

Regarding this, Lido's consultant, hasu, gave a relatively systematic answer in an interview. In summary:

1.1. Lido is not an entity, but an intermediate layer protocol, or simply understood as an "alliance". There are currently 29 node operators

1.2. Node operators are entities that actually pledge ETH, "similar" to the current POW mining pool. Lido cannot directly control node operators.

In some cases, if Lido’s values ​​​​of screening operators are too unified, it will lead to some soft governance risks. Therefore, Lido’s governance also introduces a dual governance model, and stETH pledgers have governance veto power.

1.3. If Lido does not exist, we can look at the top pledgers: Kraken, Coinbase, Binance. If the exchange occupies too much pledge, I believe it will not be a good thing.

From these aspects, Lido is more helpful to the healthy staking of Ethereum 2.0.

2. Who will launch a 51% attack? How will the attack be launched?

Vitalik once discussed the security of POS compared to POW, and the cost of launching an attack is much higher than POW: https://vitalik.ca/general/2020/11/06/pos2020.html

I personally think that if someone launches an attack, it will most likely be an exchange. Judging from the pledge trend, exchanges are also the institutions with the highest pledge volume.

The path to launch an attack may be to use pledged derivatives as trading collateral, provide above-average returns, etc., which will absorb a large amount of new pledged ETH in the short term.

If this amount is higher than 51% of the pledge, the exchange's nodes can be regarded as a single entity, and they have a certain ability to review blocks.

If they launch an attack, it will inevitably cause some adverse consequences and impacts. However, POS recovery is easier than POW. Once such an attack really happens, I believe the entire Ethereum community will fight back, and the exchange will lose its credibility.

The blockchain can be restored through forks, but due to the loss of credibility, a large number of users will withdraw their assets from exchanges.

This attack is only hypothetical and is extremely unlikely to happen. Just like if the computing power of a POW mining pool exceeds 51%, launching an attack will also cause righteous miners to migrate to other mining pools.

3. Client diversity also has certain centralization risks

Ethereum consensus layer client Prysm once had over 70% market share.

If a client accounts for the majority of the market share, when it makes a mistake, it is possible that an incorrect block will be identified as a correct block, which will result in the nodes that have not made a mistake being fined.

The Ethereum community was also actively working on this issue last year, and Prysm has now dropped to around 40%.

4. The so-called rich get richer, “smart pig game” and other capital concentration risks

Assuming an entity has 10M collateral and earns 4% collateral income every year, after 43 years of continuous compounding, it will have 51M ETH. Assuming there is no inflation in the system, this single collateral entity will exceed 51% of the currency holdings according to this operation.

This assumption does sound scary, but it is not realistic in reality. First of all, if there is such a large amount, it can only be an intermediary structure. Since the collateral of such an institution aggregates the assets of many users, it will always be in circulation and it is impossible to generate a continuous compounding effect.

If it is a single person, the current market price of this volume is 10 billion US dollars. When the price rises sharply, it is impossible to keep a large position unchanged.

Judging from the current mortgage situation, a single entity may have a maximum volume of 500,000. If a non-exit strategy is adopted based on this volume, it will take 50 years to accumulate 3 million ETH, and 100 years to reach a volume of 21 million ETH.

This risk is real, but it is too difficult to execute. You need to have enough initial assets and enough patience. If someone can do this for 50 years, he will be as good as Buffett.

In order to support the healthier development of Ethereum, pledging ETH in a chain protocol that is as decentralized as possible is a long-term support behavior.