The Centralization and Economic Challenges Behind the Ethereum Upgrade Path

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2024-11-08 13:41:38
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Ethereum, in its continuous pursuit of technological innovation, inevitably faces the dilemmas of centralization, economic vulnerability, and technical complexity. These issues not only affect the current ecological development of Ethereum but also pose risks for future upgrades.

Since its proposal by Vitalik Buterin in 2013, Ethereum has undergone several significant developments. Initially based on the PoW (Proof of Work) mechanism, its design allowed miners to earn rewards by consuming computational power. However, the high energy consumption and transaction speed bottlenecks of PoW prompted Ethereum to gradually shift towards a Proof of Stake (PoS) mechanism, introducing a series of improvements including The Merge, the Shanghai upgrade, and the Cancun upgrade. The core goals of these upgrades are to enhance network efficiency, reduce energy consumption and gas fees, and make the Ethereum ecosystem more suitable for decentralized applications.

Despite the progress made with these upgrades, new challenges have emerged. Ethereum faces a series of structural flaws, particularly in governance centralization, economic incentive structures, and technical implementation difficulties, which may impact its decentralization ideals and long-term development. This article will analyze the potential risks to the Ethereum ecosystem stemming from the core flaws of the upgrades.

1. The Original Intention of Ethereum Upgrades: Efficiency and Scalability Brought by PoS

Ethereum initially adopted the PoW mechanism, which, while ensuring network security, gradually revealed high energy consumption and scalability bottlenecks. As user numbers and transaction volumes increased, the resource consumption and congestion issues of the PoW mechanism became more apparent. To improve energy efficiency, reduce transaction costs, and enhance network speed, Ethereum completed the "Merge" upgrade in 2022, transitioning its consensus mechanism from PoW to PoS.

The introduction of the PoS mechanism aims to replace the energy-consuming mining process with "staking" ETH. Stakers gain validation rights and rewards by locking up ETH in the network, which not only significantly reduces energy consumption but also alleviates resource competition issues associated with the PoW mechanism to some extent. Additionally, Ethereum has adopted various strategies for scalability, including the introduction of Rollup technology and the Sharding plan, aiming to enhance transaction processing capacity by moving some computations and data processing off the main chain or dividing it into different shards.

However, despite these technological upgrades theoretically providing higher efficiency and lower energy consumption, Ethereum's PoS mechanism and scalability solutions have also raised a series of issues such as centralization and economic structural vulnerabilities, which may affect the decentralized nature of the network and have far-reaching implications for Ethereum's future development.

2. Centralization Risks of PoS

After transitioning from PoW to PoS, Ethereum conducts network validation through staking ETH. The validation weight of nodes directly depends on the amount of ETH staked, meaning that large holders or institutions with significant ETH can gain greater influence in network governance. While this mechanism reduces energy consumption, it inevitably raises centralization risks within the network.

Currently, there is a significant trend of centralization within the Ethereum staking ecosystem. For example, large staking service providers like Lido and Coinbase control a substantial amount of ETH in staking pools, leading to a gradual concentration of governance and validation rights among a few nodes. The risk arising from this is that Ethereum's governance is increasingly leaning towards oligopoly, which not only weakens the participation of ordinary users and small nodes but may also lead governance to deviate from its original decentralization intent. More seriously, if these few large nodes choose to withdraw in the future for economic, political, or technical reasons, the stability of the entire network will face significant challenges.

Moreover, the centralization of the staking structure also brings potential security risks. If large staking nodes control too much validation power, it could create a "single point of failure" for the Ethereum network. In the event of an attack or failure, the overall security and reliability of the network would be threatened. This risk makes it difficult for Ethereum to achieve true decentralization under the PoS mechanism.

Additionally, it is worth noting that Ethereum developers plan to activate the Pectra upgrade on the mainnet in the first quarter of 2025. The EIP 7251 proposal in this upgrade will increase the maximum effective balance of validators from 32 ETH to 2048 ETH and allow existing validators with a maximum effective balance of 32 ETH to merge their stakes. This is expected to significantly reduce the number of validators on Ethereum, exacerbating centralization issues.

3. Economic and Security Flaws of the Rollup Structure

Another key strategy Ethereum has adopted in recent years for scalability is the use of Rollup technology. Rollup is a technique that processes transactions in layers, moving some computations and data processing off the main chain to improve transaction speed and processing efficiency. Although Rollup can theoretically alleviate Ethereum's scalability issues, its complex economic structure brings new vulnerabilities.

The design of Rollup requires establishing a complex incentive mechanism to ensure network liquidity and security. The current Rollup ecosystem heavily relies on external staking and funding support, which makes the entire system highly vulnerable during economic fluctuations. If market volatility is severe, the liquidity of funds within the Rollup ecosystem may be significantly affected, leading to a decline in user experience and network stability. The dependency of Rollup on the main chain also means that when issues arise on the Ethereum main chain, the Rollup ecosystem will be impacted by a chain reaction.

Furthermore, the economic model of Rollup has not been validated by long-term market performance. Projects based on Rollup solutions, such as OP Mainnet, Arbitrum, base, starknet, zksync, and linea, face interoperability issues that lead to poor user experiences, and their functionalities overlap significantly with those of the main chain.

Previously, ETH's primary function was as a settlement layer, with large DeFi settlements occurring on the main chain. Now, a significant amount of demand has been diverted to L2. The L2 solutions that "parasitize and leech" off Ethereum have divided Ethereum's liquidity while providing minimal value capture back to Ethereum, leading to a severe loss of liquidity and on-chain transactions for Ethereum. The ETH mainnet has stagnated, internal conflicts have arisen, and community consensus has gradually fractured. Data shows that Ethereum's revenue and ETH supply destruction significantly decreased after Dencun. Total revenue is 69% lower than the average of the 150 days prior to the upgrade; the amount of ETH destroyed is 84% lower than the average of the 150 days prior to the upgrade.

In terms of security and stability, the Rollup architecture features a sequencer as a core component of the L2 network nodes, responsible for receiving transaction requests, determining execution order, packaging them into batches, and passing them to L1 smart contracts, playing a crucial role in improving transaction processing efficiency and user experience. However, if the sequencer crashes or errors before completing this process, users' transactions will remain in L2 and will not be completed in L1. It is evident that using a single sequencer may face risks such as transaction delays, crashes, and downtime, and such situations have indeed occurred.

This centralized sequencer significantly weakens Ethereum's control over L2 in terms of settlement layer dimensions, making it susceptible to risks such as malicious censorship of user transactions, errors, MEV extraction, front-running, fragmented traffic, and even forced shutdowns (e.g., Linea and Blase shutting down directly due to asset theft), which in turn affects the stability and security of the entire Rollup system. In summary, this centralized design grants excessive power to the sequencer, which has become a focal point of concern in the industry.

4. Future Potential Risks: Balancing Technical Difficulty and Decentralization

In the future, Ethereum also plans to further enhance network performance through Sharding technology. However, as a scaling solution that breaks the network into multiple smaller segments, Sharding presents significant technical challenges, requiring data consistency and security across different shards. The successful implementation of Sharding not only needs to overcome technical hurdles but also involves balancing security and scalability. This technical complexity may lead to poor data synchronization between shards and, in extreme cases, trigger network splits.

Moreover, the combination of Sharding and Rollup complicates the network's governance and economic structures. The distribution of shards and the design of Rollup increase the data consistency requirements between each shard and Rollup, posing more technical challenges for developers and node validators. If the parallel use of Sharding and Rollup fails to balance decentralization with performance enhancement, it may lead to a decline in user trust and even cause community fragmentation.

Overall, as Ethereum continuously pursues technological innovation, it inevitably faces dilemmas of centralization, economic vulnerability, and technical complexity. These issues not only affect the current ecological development of Ethereum but also pose risks for future upgrades.

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