Original title: Censorship resistance in Bitcoin and Ethereum
Original compilation: Evan Gu, Wayne Zhang, Bixin Ventures
Original compilation: Evan Gu, Wayne Zhang, Bixin Ventures
News of the U.S. Department of the Treasurys Office of Foreign Assets Control (OFAC) decision to add Tornado Cash to its sanctions list in early August put the issue of censorship resistance in the spotlight. In order to avoid related criminal liability, RPC service providers Alchemy and Infura restricted access to Tornado Cash smart contract data, and Circle (USDC issuer) also blacklisted wallet addresses on the sanction list. Blacklisted addresses are also banned by Defi protocols such as Aave, but users can still interact with some smart contracts, although many additional steps and some technical expertise are required.
This brings us to a more general question: Can blockchains be censored at the protocol level? Concerns about protocol-level censorship have emerged in the Ethereum community, with 66% of Beacon Chain validators post-merger expressing sensitivity to OFAC regulations. If more than 1/3 of validators (weighted by stake) are censored in any way, the Ethereum chain will not function properly.
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Definition of censorship
In a recent Bankless podcast, Justin Drake defined two different types of censorship: weak censorship and strong censorship
1. Weak censorship: Weak censorship occurs when certain censored block producers do not include individual transactions in blocks, resulting in a degraded user experience. For example, a compliant block producer rejects a transaction from a blacklisted address, but the transaction is still eventually accepted by a non-censoring block producer.
2. Strong censorship: Strong censorship occurs when an individuals transactions are never included on-chain. Given that the individual has lost the ability to trade, this situation can be considered to have effectively lost the asset. This can happen when the network is taken over by a majority, also known as a 51% attack, which could threaten the continued existence of the attacked blockchain.
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review
Ethereum
Ethereum
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Source: Related Network
Before we look at how Ethereum responds to the centralization threat, let’s explain why validators end up being centralized. Under Ethereums POS mechanism, block producers can choose which transactions to include in the next block and how to sequence them. This allows validators to participate in the process of MEV extraction, which Amber defined very well in their recent article on ETH mergers.
Source: Flashbots
Source: Flashbots
As shown, validator rewards increase significantly once MEV is taken into account. Due to the economic incentives brought by MEV, larger players run more validators, eliminating individual and non-professional validators. Therefore, ordinary holders are more inclined to join the verification node pool through pledge services to obtain higher and more stable income, thereby increasing the centralization of verification nodes.
Another consideration regarding the centralization of stake nodes is cryptocurrency trading platforms. The trading platform is still the best place for users to obtain Ethereum Token. Considering the huge number of users they have, many Tokens will naturally gather on these trading platforms, and the convenient benefits provided by the trading platforms through their Staking platforms will attract the gathering of Tokens. We should educate users about the risks of using centralized platforms for staking, such as the possible implications if centralized platforms may choose to act maliciously due to judicial pressure.
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So, how does Ethereum respond to scrutiny about centralization?
Solution 1: Separate block proposers and builders
One solution that is getting a lot of attention right now is Proposer Builder Separation (PBS). PBS separates the roles of block proposer and block construction, so that verifiers can get rewards from MEV without being complex operators, thus reducing the centralization problem.
There are three key actors in the operation of the blockchain, which can check and balance each other to mitigate and ultimately eliminate potential censorship.
Builders, who are dedicated to building blocks, extract the maximum MEV and transaction fees by ordering transactions. Afterwards, they will pay Proposers a proposal fee and put their block on-chain. Therefore, without the help of the Proposer, those builders for review purposes will not be able to publish transactions on the chain.
Proposers, also known as validators, either choose the most popular block, or they dont include a block at all. If they believe a block builder is censoring transactions, they have the ability to propose a censorship resistant list (crList) that builders must include as long as the block is not full, or their block is not proposed. Since EIP-1559 has been implemented, over 80% of blocks contain spare gas, which means that as long as users pay a priority fee above the base fee, they should be able to have their transactions included in blocks. In summary, Proposers can achieve the maximum benefit by choosing the block that pays the largest amount, but still have the ability to use crList to force through the review.
The prover will monitor the block building process and only prove it if the proposers block contains the highest paying block. This will prevent malicious proposers from censoring transactions.
herehereto know more information.
Solution 2: Encrypted mempool
bitcoin
bitcoin
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Source: Cambridge Bitcoin Electricity Consumption Index
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So, how does Bitcoin deal with the censorship issues created by the centralization of mining pools?
Solution 1: Switch mining pools
Once mining pool operators are subject to censorship regulations that are against miners’ interests, miners can easily move to other mining pools (e.g., move away from the censored pool). Since the mode of purchasing computing power on demand is adopted, miners only need to change the address of the mining pool in the mining software to switch to a new mining pool. During 2021 when miners were banned by the Chinese government, miners were able to quickly migrate abroad and switch addresses to offshore mining pools, and the computing power has now recovered and is higher than before the ban was announced.
While Ethereum can make validators unstake or restake at their will, there is still a time lag due to cooldown periods and queuing systems.
Solution 2: Let miners have more control over the block building process
Most Bitcoin miners direct their hashpower to mining pools, where they communicate with those pools using a messaging protocol called Stratum v1, which organizes miners creation and submission of hashes. If mining pools collude to censor transactions, the community has no recourse. But with Stratum v2, miners will be able to choose their own transaction sets, giving them more control over the block building process, which counters the censorship intent of malicious pool operators.
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Solution Three: Free Market Competition
Proponents of Bitcoin argue that the proof-of-work mining economic incentive is the best form of resistance to any transaction censorship. As block rewards drop each halving cycle, transaction fees will tend to be 100% of miner revenue. So even if any regulatory compliant mining pool or miner scrutinizes paid transactions, other miners/pools in different jurisdictions will be more than happy to take advantage of this and steal the transaction. Ultimately, these compliant mining pools or miners will be defeated in the free market, causing their market share and profitability to decline.
Conclusion 1: Bitcoin can handle censorship issues caused by centralization in the block creation process better than Ethereum.
Bitcoin today is much more capable of dealing with centralized censorship in the block building process. Miners can now switch pools without delay if there are pools that review certain transactions, greatly increasing miner autonomy.
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Issue 2: Strong censorship risks can occur if the network has a small security budget
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Ethereums Security Budget
Once a 51% attack is launched on Ethereum, all new deposits or withdrawals may be reviewed by the attacker, and it will become difficult for the network to recover at this time. Therefore, the Token distribution in the network should be decentralized as much as possible to prevent the required Token from being obtained through coercive means and attacks. At the time of writing, 13.6 million ETH is staked on the beacon chain. The economic security of Ethereum can be obtained by multiplying 13.6 million ETH by the price and multiplying by 51% to get the minimum amount required for transaction review. At the current price of $1,700 per ETH, todays economic security is about $11.5 billion. In practice, the cost would be much higher, given that the price would rise non-linearly as demand for ETH increased.
Since taking out these funds is not a problem for some organizations or countries, we still need to consider preventive solutions.
Solution 1: Encourage more users to stake
Compared to other POS networks, only 11% of ETH is currently staked (e.g. 77% for Solana, 66% for Cosmos, 65% for Avalanche), meaning there is a lot of potential. As the stake increases, it becomes very difficult for an attacker to obtain 51% of the total stake.
However, one obstacle preventing more people from staking is the opportunity cost of DeFi benefits for users. If users can obtain better returns in DeFi, users may prioritize financial incentives, and the incentive effect of ETH pledged returns will be reduced. One of the solutions to break down the barrier is the liquid staking protocol, but this may also bring us back to the centralization problem we saw with Lido. While we can see that Lido is distributing stake to about 30 validators on its whitelist, the listing of this whitelist is still approved by Lido. Therefore, selection criteria and the ability to add and remove validators are critical, implying strong governance within DAOs.
hereherefor a more detailed description of the voting mechanism and subsequent results.
Solution 2: Diversify validators to prevent coercion to gain governance rights
If ETH cannot be obtained in the market, another way to gain control of the network is to force 51% of the validators. Therefore, the anti-censorship effect can be achieved by increasing the diversification of verifiers in the following forms:
Increased jurisdictional/geographical diversity to ensure no single jurisdiction/country can take a validator offline
Increase operator/stakeholder diversity to ensure that mandatory scrutiny is extremely difficult when stakes are widely distributed
Increase client diversity to ensure that no single bug in a validator client can take a validator offline
Reduced hardware requirements for participation to ensure everyone can start a validator as needed
Increase the number of validators with complete copies of transactions
Solution 3: Societal Layer Intervention
If preventive measures fail, Ethereum will intervene at the social level. The specific content is to automatically execute the bifurcation process after the censorship is detected, and the system will reserve enough time for the bifurcation consensus to be reached. Ideally, a complete online node would check the memory pool to identify and identify which blockchains are censorship-oriented. Once found, they will fork and punish the censorship-purpose chains. None of these actions Intervention at the social level is required.
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Bitcoins Security Budget
If Bitcoin is subject to strong censorship, miners will be able to mine all rewards and reorganize the chain as they see fit. Given the current hash rate of 230m TH/s, assuming that existing miners do not participate in the attack, attackers can only control the network if they have a hashrate of more than 230m TH/s. Lets do the math, using the most efficient ASIC chip on the market today, Antminer S19 PRO (110 TH/S), a total of 2.09 million ASIC chips (230,000,000 TH/s divided by 110 TH/s) are needed to carry out the attack. At todays price of $4,400, the total cost of acquiring the hardware to attack the network is $9 billion, not considering energy costs.
Solution 1: Bitcoin network is more censorship resistant due to the difficulty of obtaining ASIC chips
While the cost is not out of reach for some serious attackers, there is significant resistance to acquiring ASIC chips because only a few companies can produce them. And since there is not enough supply coming online every year, attackers cannot launch quick attacks.
Solution 2: Low conversion rate of miners leading to decentralization of the Bitcoin network
Obtaining the machines needed to control the network is very difficult, so attacks are likely to be achieved by coercion or control over existing mining pools. We can solve this problem by relying on the mining pools emerging in different regions of the world, because their emergence greatly reduces the switching cost of miners, making it possible to switch quickly when facing censorship, thus achieving censorship resistance.
Conclusion 2: Bitcoin is more resilient than Ethereum in preventing strong 51% censorship attacks. Ethereums solution of using the social layer as the last line of defense provides more power to the few, but there are still many problems with social consensus.
On the face of it, Ethereum has a higher security budget than Bitcoin. However, acquiring hardware in taking over the Bitcoin network is more of a hindrance than the cost of acquiring an Ethereum majority.
If an attacker takes an alternative route to a censorship-strong centralized mining pool to gain control of the network, Bitcoins solution is much simpler, since honest miners can help rebalance the hash rate by switching to a non-aggressive pool.
With Ethereum heavily censored, while the social layer can intervene, many questions remain about how to transition to a user-activated soft fork. First, how can social consensus be achieved among non-attack participants? Can a majority of the new minority make a decision? Or is it up to the core team to decide? The decision-making process can be likened to Ethereum DAO voting to reach a majority decision. So should it be decided by a majority of voters or a majority stake? A common criticism in DAO voting is that a large majority of holders can vote for an outcome, only to be overruled by a single holder with a larger stake. This is not intended to reflect the actual process by which fork rules are determined, but rather to highlight problematic aspects of social governance that the Ethereum community has yet to implement. In the end, it may be that the social consensus layer inevitably leaves room for politicization, as Nic Carter said, and Ethereum may suffer the same fate as the expropriating national government.
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stable currency
stable currency
The denominations of every cryptocurrency are pegged using stablecoins, and Bitcoin and Ethereum are no exception. Taking a quick look at the market cap of stablecoins, we can see that the top 3 are all backed by fiat collateral held by centralized custodians. This puts them in the realm of regulation, which begs the question: what if custodians make it impossible for users to convert stablecoins to fiat simply because of government censorship or prohibition? While these are unlikely to happen, the knock-on effects are dire. Not long ago, USDC issuer Circle froze funds worth more than 75,000 USDC associated with Tornado Cash addresses in accordance with the OFAC sanctions list.
Potential Solution 1: Overcollateralized Stablecoins
One can mint a token pegged to a fiat currency in exchange for cryptocurrency collateral. MakerDAOs DAI is currently the largest decentralized stablecoin in the crypto space, and when asset prices start to fall, they maintain the 1 DAI = $1 peg by liquidating pledged crypto collateral. Since 2017, they have weathered the price volatility of Bitcoin and Ethereum and have proven to be robust. However, even they have over 30% USDC exposure as part of their collateral. Following the recent USDC and Tornado cash incidents, they are currently having governance discussions on whether they need to implement negative interest rates to allow DAI to circulate more freely in order to realize their vision of becoming a public, neutral financial utility infrastructure.
hereherefor a more detailed explanation of how RAI works.
However, a fundamental problem with over-collateralized stablecoins is that they continuously extract liquidity from the market (which is not ideal if we expect financial activity to take place on cryptocurrencies). We also have to consider what kind of collateral can be collateralized as the base currency.
Bitcoin Viability: Bitcoin is pretty much the best collateral out there. But even if there are ready-made solutions in the market, since over-collateralization will extract liquidity from the market, it is not an ideal solution if we expect financial activities to happen on-chain.
Viability on Ethereum: Stablecoins using ETH as collateral may not be the way to go. If ETH faces scrutiny, these stablecoins will face redemption issues as users may want to exit their ETH positions. While using Bitcoin as collateral mitigates this associated risk, it still faces the problem of liquidity extraction.
Potential Solution 2: Algorithmic Stablecoins
Although algorithmic stablecoins are somewhat notorious due to the Luna debacle, algorithmic stablecoins are an alternative. The goal of algorithmic stablecoins is to create an anchored stablecoin that does not require collateral, but instead uses some form of governance token. Anchored. The peg is then made through arbitrage opportunities between the governance token and the algorithmic stablecoin. But this kind of system design is very fragile because it requires rational participants and firm confidence in the value of governance tokens.
Once confidence is broken, a death spiral may appear: when the price of governance tokens falls, market participants not only fail to maintain the stability of token prices, but further sell their holdings of governance tokens, exacerbating the price drop.
In theory, algorithmic stablecoins could serve the same purpose as parts of our existing banking system without extracting liquidity. But there seems to be no suitable candidate project that could refine the system design of an algorithmic stablecoin, making it less risky.
Viability of Bitcoin: Not applicable, there are no viable candidates in the market.
Viability of Ethereum: Not applicable, there are no viable candidates in the market.
Potential Solution 3: Bitcoin or Ethereum as Decentralized Stablecoins
Ponder: What if Bitcoin became a censorship-resistant decentralized “stablecoin”? This seems to solve the problems faced by Bitcoin and Ethereum.
Viability of Bitcoin: It seems that Bitcoin holders can all join, because 1 BTC = 1 BTC. This might address security budget drops due to lack of transaction activity (to recap: block reward tends to zero = all miner revenue depends on transaction fees = enough transaction activity needed to stay solvent and keep hash rate high) . If BTC is widely used on Ethereum (and any other programmable blockchain), transaction activity will come from it being a base layer currency for DeFi and many other applications, which can then maintain economic incentives for miners, further strengthening the defense against any attacks censorship resistance.
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RPC network
RPC (Remote Procedure Call) networking is essential to blockchains. It provides access to server nodes and allows users to communicate and interact with the blockchain while interacting with some stand-alone program. Given the specific hardware required to run these RPC nodes, most developers turned to centralized RPC networks such as Infura and Alchemy for their dApp API needs. The downside is that these centralized RPC networks can restrict access to blockchain data if required to comply with any jurisdictional laws, and also act as a central point of failure that is vulnerable to hacking. The end result is that users may face service interruptions, greatly reducing user experience.
Solution 1: Light Client
Ethereum has been hoping for more users to run their own light clients. Light clients do not store the full state history of the chain, but rely on sync committees to sync to the chain. They can also make arbitrary queries about the state of the network by asking other full nodes rather than through centralized Infura or Alchemy.
Bitcoin has also always encouraged users to run their own light clients. Light clients on Bitcoin can interact with the network but do not store the blockchain, and can query other nodes for blocks and transaction data of interest.
Solution 2: Decentralized RPC Network
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Core developers and project team
The arrest of Tornado Cash founder Alexey Pertsev has sparked debate about whether developers or project teams can be held accountable for their open source code. So should they be anonymous? Easily identifiable identities place individuals within jurisdictions, which can mean they are vulnerable to regulatory control. While there is no explicit requirement that founders or developers be held accountable for their code, it may be wise to ensure that teams are geographically distributed to address any potential scrutiny from a particular jurisdiction.
Conclusion 3: External dependencies have a significant impact on the censorship resistance aspects of base layer protocols.
epilogue
epilogue
Even though we have done extensive comparisons between Bitcoin and Ethereum, both of which have their own properties and solutions for censorship resistance, such as the properties of Bitcoin that make them suitable for base-layer currencies, we still need something like Ethereum The programmability of the blockchain is required to have on-chain applications. At the end of the day, the qualities of decentralization, censorship resistance, and sovereign independence are what Bitcoin, Ethereum, and many other blockchains are all trying to achieve.
