Is Ethereum becoming more decentralized again?

Almost a month ago, the conversion of the Ethereum consensus mechanism was successful. What had been planned for several years could finally be implemented satisfactorily: the merge. The supposed upgrade should increase scalability and reduce power consumption. However, what was already clear beforehand: decentralization is shrinking.

Decentralization at Ethereum is crumbling

Staking needs to be learned. Not every “0815 cryptobro” knows the exact restrictions. To become an ETH staking validator, one needs to stake 32 ethers. In addition, each validator must be online 24/7 and running specific software on a computer in order to participate in the transaction validation process. In return, validators receive staking rewards in ETH. Currently, this allows an annual return of achieve about 5 percent on ether.

This circumstance has created a market for projects such as Lido and other staking providers that also allow small investors to participate in staking with any amount of ETH. Lido and other providers pool their users’ deposits into 32 ETH blocks and hand them over to a variety of professional staking operators who provide the hardware for the validators and manage them.

Because larger staking pools like Lido have a higher chance of validating the next block – and thus collecting the staking reward – more and more customers are entrusting their ether to Lido. Perfect conditions for increasing centralization.

Decentralization through hosting optimization

The situation worsened at the end of August. At the time, the German cloud service Hetzner GmbH clearly spoke out in its general terms and conditions against any activities involving cryptocurrencies. Just before the Ethereum merge, that meant a 16 percent ETH node loss. Trust in centrally controlled hosters is an unsolved dilemma for the blockchain.

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A cooperation between OVHcloudthe European leader in hosting services and the company Bitfly, which is behind the ETH pool Ethermine, comes into play here. To counter centralization, the two companies provide data centers distributed around the world. Robert Jandt, Business Development Manager at OVHcloud, explains to BTC-ECHO how this responsibility is handled.

As a multi-local cloud provider, OVHcloud also supports the decentralized approach within our network by offering users the choice between several international data centers – currently there are 33 data centers on four continents.

Robert Jandt, Business Development Manager, OVHcloud

competition welcome

Functioning competition is essential for the existence of any market. If the largest market share is bundled with one provider, this provider can decide on the price, censorship and offer. The best example of this: AWS hosting. Around 54 percent of all Ethereum nodes run on the Amazon Web Service. Should the Internet wholesaler decide against cryptocurrencies and their staking, there would be a temporary drastic loss of validators. The dreaded 51 percent attack: a stone’s throw away. Bitfly sees room for improvement here.

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“Butta”, CMO and spokesperson at Bitfly, confirms to BTC-ECHO that the basic premise for Ethereum’s decentralization is a balance between home stakers and corporate-run nodes.

As long as the [Dezentralität] is given, healthy competition between cloud providers is also welcome, as it allows freedom of choice.

“Butta,” CMO and spokesperson, Bitfly

With the state-owned energy company Électricité de France (EDF), there is already a small participant in the entire competition. The largest energy supplier in France recently announced that it is actively operating more than 150 Ethereum nodes.

More decentralization in prospect again?

Quit pro quo. OVHcloud and Bitfly’s plan to offer “long-term security for node hosting” to contribute to decentralization is well and good. However, if validators switch from AWS to OVHcloud, only the market shares of the respective providers will shift. At least the problem of political censorship is addressed with the “international data centers”.

Whether the growing competition to Lido or AWS will lead to more decentralization on the Ethereum network remains to be seen. It is and remains a blockchain trilemma.