Ethereum’s upgrade to proof-of-stake (PoS) may make it more vulnerable to government intervention and censorship, according to Merkle Science’s lead researcher.
Speaking to Cointelegraph following the Ethereum merger, Coby Morgan, a former FBI analyst and principal investigator at crypto compliance and forensics firm Merkle Science, expressed his thoughts on some of the risks posed by the transition from Ethereum to PoS.
While centralization issues have been widely discussed before The Merge, Moran suggested that the prohibitive cost of becoming a validator could lead to the consolidation of validator nodes in larger crypto companies such as Binance, Coinbase, and Kraken.
To become a full validator on the Ethereum network, you need to stake 32 Ether (ETH), which is worth about $47,000 at the time of writing.
A pre-merger report by blockchain analytics platform Nansen earlier this month revealed that 64% of ETH staked is controlled by just five entities.
Morgan went on to say that these larger institutions will be “subject to the whims of the world’s governments”, and when validator nodes identify sanctioned addresses, they can “reduce rewards and ultimately bring the system down”, with companies prevented to interact with them.
Or you will comply and deflect this type of interaction […] or you risk being fined, scrutinized or potentially sanctioned yourself.
Vitalik Buterin discussed this risk on an Aug. 18 developer call, suggesting that one form censorship could take is for validators to choose to exclude or filter penalized transactions.
Vitalik went on to say that as long as some validators do not comply with the sanctions, these transactions will be picked up in subsequent blocks and the censorship would only be temporary.
On August 8, crypto mixer Tornado Cash became the first smart contract sanctioned by a US government body.
Related: Rep. Emmer requests an explanation of OFAC’s Tornado Cash penalty in Sec. Yellen
In response, several entities have complied with the sanctions and prevented sanctioned addresses from accessing their products and services.
The development has had a major effect on the Ethereum community, with EthHub co-founder Anthony Sassano tweeting on August 16 that he would consider Ethereum a failure and move on if permanent censorship occurs.
I want to be very clear on this:
If the Ethereum base layer ends up participating in *permanent* censorship, then I will consider the Ethereum experiment a failure and move on.
Fortunately, I think the Ethereum community is strong enough to fight back against base layer censorship.
— sassal.eth (@sassal0x) August 16, 2022