Bankless: Inventory of the centralized pain points and solutions of the Ethereum ecosystem
Compilation of the original text: Mary Liu, Bitui BitpushNews
Compilation of the original text: Mary Liu, Bitui BitpushNews
The Ethereum ecosystem is more centralized than it needs to be.
We often praise the accessibility of staking, but rarely discuss the large amount of Ether staked on Lido. We support decentralized currencies, but still rely heavily on centralized stablecoin issuers. We penalize L1s for compromising on the principle of decentralization, but we have similar problems in our own scaling solution.
However, there is hope, because in a centralized place, developers usually have a solution. This article will explore Ethereum’s centralization pain points around staking, stablecoins, and rollups, and what is being done to address them.
pledge
Pain Points: Ethereum’s Security Is Concentrated on a Few Platforms
LIDO’s liquid staking derivative (LSD) “stETH” dominates DeFi; the token has the highest liquidity of all staking derivatives, it stands out among its peers as a blue-chip liquid collateral, Lido controls Ether 17.6% of Square TVL. One out of every three Ethereum validators (30.6%) belongs to the protocol, and its staked derivatives have an absolute 74.9% share of the LSD market.
While many decentralized protocols (such as Rocket Pool) allow anyone to act as a node operator, Lido's current V1 release only allows whitelisted operators to run the protocol's validators, pre-approved partners staking large amounts of ETH is A centralized "hidden danger".
As of Q4 2022, Lido has 29 active Ethereum node operators.
The Solution: PoS and Withdrawals
Lido is an easy target to draw comparisons to, but it should be acknowledged that Ethereum's transition to proof-of-stake consensus (Merge) has contributed to the decentralization of the network.
Lido may control 30.6% of the validator set, however, Bitcoin’s largest mining pool operator controls 31.7% of the hashrate. The top 12 BTC miners collectively control 96.1% of the network’s hash power, while the network’s 12 largest stakers hold 70.3% of Ethereum.
PoS better serves small-scale participants, such as individual validators, than PoW systems, allowing more participants to be rewarded for securing the network. Like the Merge hard fork before it, Ethereum’s latest network upgrade, Shapella, is a crucial step toward decentralized network security.
Shapella supports withdrawals, and for the first time since the launch of the Beacon chain in December 2020, it provides the liquidity of pledged ETH for independent pledgers and pledge pool users. Withdrawals provide options for stakers seeking liquidity: Standalone staking and staking pool solutions are now effective competitors to LSD for stakers seeking to maintain liquidity.
stable currency
stable currency
Pain point: Excessive reliance on centralized stablecoins
After Circle announced that it had $3.3 billion trapped in the failed Silicon Valley bank, its stablecoin faced indiscriminate selling pressure from the market.
USDC fell to an all-time low of $0.82 on centralized exchanges as liquidity evaporated from on-chain stable swap pools. Maker's DAI and Frax's FRAX, both heavily collateralized by USDC, inevitably fell victim and traded at a steep discount during the sell-off.
Thankfully, the market noticed the danger and chose to diversify into USDC, with the stablecoin’s market cap down 30.1% since the March banking crisis!
Unfortunately, the lessons learned left much to be desired: Instead of vowing to ditch centralized stablecoins, we simply dismissed USDC in favor of Tether’s opaquely backed stablecoin, USDT. USDT’s market capitalization has been on the rise since the Circle event, up 13.6%, and is approaching the all-time high it reached before the Terra-Luna crash.
The Solution: Building the Next Generation of Stablecoins
The extremely limited reserve transparency of the centralized platform is only a stopgap measure. The crypto market should turn to a truly decentralized stablecoin alternative. Seizure-proof / confiscation-proof and fully transparent on-chain stablecoin alternatives are the general trend.
While Reflexer's RAI has long been lauded for having these advantages, its reliance on ETH as sole collateral is limited in scale, and persistent negative redemption rates hinder adoption, and no one wants to hold a "stablecoin" with a depreciating dollar !
HAI, a fork of RAI deployed to Optimism in the near future, aims to make up for the shortcomings of its predecessor by accepting yield-generating stETH as collateral, a move that hopes to turn the redemption rate into a positive one.
At the same time, Berachain's HONEY stablecoin will be mortgaged by various assets mortgaged to the chain's unique liquidity proof consensus layer, which can help HONEY achieve UST-like scalability without the risk of endogenous mortgages.
Rollups
Pain point: Rollups are centralized and lack necessary security
Sequencers (sequencers) sequence L2 transactions and build local chains, which act like validators on Ethereum, but require higher trust assumptions.
While the single ordering model used by most rollups is efficient and offers low gas fees and fast transaction times, they are controlled by a single entity, representing a threat to network vitality and questions about centralization.
Alt-L1 chains other than Bitcoin have long been criticized for sacrificing uptime and decentralization in pursuit of low fees and high TPS. Currently, Ethereum’s scaling experiments have produced similar results and undermined the benefits of transacting on a trustless network.
A brief glance at the "risk" classification of the top ten Ethereum scaling solutions on L 2B EAT reveals that there is a clear gap between L2's situation today and our ideals.
Optimism and forks like Metis Andromeda lack proof-of-failure, while leading rollup solution Arbitrum only allows whitelisted participants, and without permissionless state validation, malicious sequencers could include bogus transactions.
Additionally, many rollups contracts are upgradable, a feature that allows the owner to change the code (presumably to fix bugs). Unfortunately, updating the battle-tested code resets the Lindy clock and can cause bugs that compromise the integrity of the rollups. The $200 million Nomad bridge attack in August 2022 demonstrated the pitfalls of upgradable contracts.
Solution: Implement a decentralized sequencer and keep building
A vague promise to work toward decentralization of the sequencer set can be seen on every rollup's roadmap. The hard part is how! Optimism, for example, lists a “decentralized sequencer” as a goal, but notes that “the precise mechanism for sequencer rotation has not been finalized.”
While the would-be L2 team is privately working on internal solutions to decentralize the sequencer, various exciting external solutions are emerging to address this pain point.
One potential solution gaining traction is “based” sequencing, explained by ethereum researcher Justin Drake in a March 10 forum post. In this model, L1 block proposers work with searchers and builders to permissionlessly include the next rollup block as part of the L1 block.
Based rollup inherits Ethereum's liveness and safety guarantees, but its throughput is limited by L1's transaction ordering and data availability. Additionally, transaction confirmations are bounded by twelve-second block confirmation times, eliminating the fast pre-commits enjoyed by L2 traders like Arbitrum.
Espresso, Astria, and Radius are innovative protocols that aim to provide middleware sequencer solutions that enable rollups to access a decentralized sequencer network while circumventing the sequencing-based L1 transaction processing bottleneck.
In addition to the decentralized sequencer set, the shared sequencer layer promises native cross-rollup atomicity and bridge-select rollups into the network, much like Optimism's OP stack "hyperchain" vision. However, any Optimism or zero-knowledge rollups can access these shared sequencers regardless of their construction. Additionally, these solutions can quickly leverage EigenLayer restaking to improve capital efficiency and increase sequencer efficiency.
Unfortunately, more time and further development are the only remedies for improving the rollup risk profile in terms of the license-free regime and the restrictive nature of rollup contract upgrades. The lack of effective fraud proofs and upgradable contracts reflects the reality of the compromises required to scale on Ethereum today.
Vitalik proposed a three-stage taxonomy for classifying rollups according to the number of "training wheels" required. The first stage rollup, the second classification, has a proof-of-work system, and the second stage "no training wheels" rollup eliminates the upgradeability of smart contracts.
epilogue
epilogue
If it weren't for these new developments, ethereum probably wouldn't be struggling with these centralization issues, crypto is at the forefront of permissionless financial innovation, we're still on the road to solving the problem, don't let a weird trust assumption or two stop you Paces, let them act as catalysts for change and innovation, and overcoming them not only increases security but also opens up new (and potentially hugely rewarding) opportunities for users.
The future is bright, the crypto frontier is constantly changing, and despite the shortcomings, we will continue to build.
