ETHEREUM’s elephant is now in the room. Part 1 | Jeremiah John | Coins | January 2024

SAt one point, nine men were asked to touch a part of an elephant and report what they had touched. Walls, snakes, spears, trees, fans, ropes… It was the end result they claimed, each confident that his or her piece defined the whole. The same was true for Ethereum. But what is happening?

There has been a growing consensus about Ethereum and its future for some time. Most people think that the network is coming to an end and that we have lived life to the fullest. Crypto Potato recently asked whether Ethereum sacrificed mainstream adoption for decentralization. Too many people don’t realize how this has played out on the network, some believe this will have dire consequences, and others believe the network is facing its demise. This three-part essay will explore these and more.

This three-part essay will look at these concerns, everything you need to know about them, and determine whether they have any credibility. Think of this essay as another part of the elephant in the room. Hopefully, we can see the bigger picture at the end and address the elephant in the room.

Problem 1: Centralized L2:

In the first part, we will look at the innovations that have accelerated Ethereum’s scalability. Ethereum’s Layer 2 (L2) was created due to the inherent limitations of the base layer (L1) and the community’s constant pursuit of scalability. Although challenges such as centralization still remain, Layer 2 is now an integral part of the Ethereum ecosystem, enabling faster, cheaper, and more accessible blockchain applications. Rollup achieves this by relying on a sequencer, an entity that packages and submits transactions to the L1. Roll-ups emerged in the late 2010s and were a major breakthrough. They process off-chain transactions and batch them into a single “proof” submitted to the mainnet (L1), significantly increasing TPS and reducing fees. A small number of powerful sequencers have emerged, raising concerns about their potential impact and single points of failure. Concentration!

The emergence of a centralized layer in Ethereum is a complex issue with many factors. Although Ethereum’s core pursues decentralization, centrality is incorporated into various aspects of the ecosystem.

Although talking about this centralization may seem abstract and idealistic, the examples listed below will begin to give you a sense of centralization within the Ethereum layer.

1. Layer 1 (Consensus Layer):

• Concentrating staking pools: The move to Proof of Stake (PoS) has improved accessibility to participate in consensus, but has also introduced centralization issues. Some large staking pools (e.g. Lido) hold a significant portion of staked ETH, potentially giving them a disproportionate influence. (More on Lido later)
• MEV-Boost Relays: Transaction ordering at Layer 1 is influenced by special services called relays. Currently, a small number of relays play a major role, raising concerns about possible transaction manipulation and censorship.

2. Layer 2 (execution and rollup):

• Sequencer in Rollup: Layer 2 rollups, such as Optimism and Arbitrum, rely on a centralized sequencer to package and submit transactions to layer 1. This dependence on a limited number of operators creates a single point of failure and the risk of censorship.
• Main customers: Although multiple clients exist to run Ethereum nodes, Geth enjoys a high market share, potentially creating vulnerabilities if compromised.

Reasons for centralization:

It’s easy to jump to conclusions and chastise industry players for their choice to avoid centralization, but the technical trade-offs (Rollup’s centralized sequencer allows for faster, cheaper transactions), network effects (early entrants and incumbents have significant advantages) ), regulatory uncertainty (fear of regulatory risk may prevent small companies from entering the market) are some of the reasons considered. The latter two reasons are situational and arise from not being sufficiently involved in the network initially. Nonetheless, that reason is not enough. Because if this continues, the network and the wider industry will continue to lose its decentralized appeal. What is Ethereum doing regarding these concerns?

The Ethereum community is actively researching solutions to mitigate centralization risks. However, more information is needed to record their solution. Stakeholders must actively participate in the solutions presented by Ethereum. Some questions stakeholders may ask are attached to the solutions listed below.

• Promoting decentralized staking services: Encourages smaller staking pools and distributed validator setups. How is this shaping up? How do you encourage small staking pools?
• Decentralized relay development: We explore alternative mechanisms for transaction ordering at layer 1. What alternatives are there?
• Client diversification: Encourage the development and adoption of alternative Ethereum clients. How easy is it to install and manage?
• Distributed Sequencer Protocol: We study and implement a protocol for more distributed sequencer selection in rollups.
• Distributed L2: Yes, current L2s like Optimism and zkRollups have elements of centralization, mainly in sequencers and validators. Developers are actively working to decentralize existing L2s (e.g. Optimism’s decentralized sequencer) and create fully decentralized alternatives such as StarkNet and Immutable X.
• Trustless rollup:
• Some zkRollups, such as Aztec, aim to be trustless, but complete trustlessness for all rollups and aspects (e.g. setup and ongoing transactions) is still evolving and is likely not yet fully achieved.
• To make informed decisions, it is important to understand the specific trust assumptions of each rollup.
• Centralized node hosting:
• Relying on centralized services to host Ethereum nodes weakens the censorship resistance and decentralization of the network. Ideally, you should vary your node hosting across providers.
• Decentralized node hosting solutions such as Infura and Alchemy are also gaining popularity, and the Ethereum roadmap aims to improve base layer scalability, potentially reducing reliance on centralized L2 in the future.

This allows stakeholders to worry about the future of the platform while remaining informed of ongoing developments, critically evaluating solutions and trust assumptions, and diversifying their activities within the ecosystem. All of this is important for informed participation. Stay informed, critically evaluate information, and make decisions based on your risk tolerance and goals.

So we have carefully concluded how the emergence of Ethereum L2 and centralization is only one part of the elephant in the room. In the next essay we will move on to the next part, Lido. Since these issues share common themes and affect each other, Elephant should have taken on more structure by then. This is helpful because these issues are interrelated and are some of the issues facing the space as it gains more and more mainstream adoption, especially the blockchain trilemma problem. Any attempt to solve these “Ethereum” problems translates into solving a bigger, broader problem.