Possible futures of the Ethereum protocol, part 3: The Scourge

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2024-10-20 02:00:03

Special thanks to Justin Drake, Caspar Schwarz-Schilling, Phil Daian, Dan Robinson and Max Resnick for feedback and review, and the ethstakers community for discussion.

One of the biggest risks to the Ethereum L1 is proof-of-stake centralizing due to economic pressures. If there are economies-of-scale in participating in core proof of stake mechanisms, this would naturally lead to large stakers dominating, and small stakers dropping out to join large pools. This leads to higher risk of 51% attacks, transaction censorship, and other crises. In addition to the centralization risk, there are also risks of value extraction: a small group capturing value that would otherwise go to Ethereum's users.

Over the last year, our understanding of these risks has increased greatly. It's well understood that there are two key places where this risk exists: (i) block construction, and (ii) staking capital provision. Larger actors can afford to run more sophisticated algorithms ("MEV extraction") to generate blocks, giving them a higher revenue per block. Very large actors can also more effectively deal with the inconvenience of having their capital locked up, by releasing it to others as a liquid staking token (LST). In addition to the direct questions of small vs large stakers, there is also the question of whether or not there is (or will be) too much staked ETH.

This year, there have been significant advancements on block construction, most notably convergence on "committee inclusion lists plus some targeted solution for ordering" as the ideal solution, as well as significant research on proof of stake economics, including ideas such as two-tiered staking models and reducing issuance to cap the percent of ETH staked.