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Ethereum’s Decentralization Questioned as Block Builders Censor Transactions Tied to US Sanctions

A foundational principle of Ethereum’s initial vision was decentralization, envisioning a blockchain operating free from constraints imposed by centralized entities such as governments and corporations. However, recent data suggests that this ideology is facing a test, as key Ethereum players are increasingly involved in censoring transactions associated with U.S. sanctions.

The Turn Toward Censorship

A significant turning point occurred last year when the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash, an Ethereum mixing service facilitating private transactions. OFAC asserted that the tool was being utilized by terrorists and other illicit actors.

In response, Tornado Cash’s code was added to the same U.S. blacklist that includes entities like North Korea and Hamas. This move was met with criticism from supporters who viewed it as government overreach and censorship. However, Ethereum has not remained immune to such actions.

Recent research by Ethereum Foundation researcher Toni Wahrstätter indicates a notable increase in the censorship of transactions tied to U.S. sanctions on Ethereum. The metric measuring “censored” blocks on Ethereum has risen from around 25% in November 2022 to approximately 72% at present.

The surge in censorship on Ethereum is primarily attributed to block builders, the entities responsible for assembling transactions into blocks and submitting them to validators for inclusion in the Ethereum blockchain. Currently, five major block builders contribute to over 90% of Ethereum blocks. Among them, only Titan Builder has asserted that it does not filter transactions in this manner.

As the sole block builder processing all transactions without censorship, Titan Builder claims over 20% of the blocks. However, if Titan Builder were to engage in censorship, according to Wahrstätter’s analysis, the overall Ethereum censorship rate could immediately soar to over 90%. This heavy reliance on a handful of builders contradicts the decentralized ethos that the blockchain technology originally promised.

Impacts on Ethereum’s Core Values

For numerous members of the Ethereum community, the growing trend of censorship marks a departure from the network’s foundational principles. Ethereum’s appeal lies in its decentralization, emphasizing being uncontrolled and free from real-world biases. However, with block builders wielding significant influence over the transactions added to Ethereum, they now have the power to selectively exclude addresses flagged by OFAC.

While some builders argue that this censorship is a prudent measure to comply with U.S. regulations, critics view it as establishing a perilous precedent. The concern is that centralized entities might override Ethereum’s fundamental coding to conform to external rules, thereby restricting full blockchain access for individuals sanctioned by the U.S. government. This raises questions about the balance between compliance and the core tenets of decentralization in blockchain technology.

Centralization Creeping In

Beyond the concerns of censorship, the concentration of essential transaction functions within a small number of dominant block builders could introduce security risks, as noted by experts. Moreover, these influential players gain privileged access to pending transaction data, potentially enabling them to optimize profits through trading strategies before transactions are officially added to the blockchain. This situation raises significant issues related to fairness and transparency within the Ethereum ecosystem.

Ethereum was initially conceived as a decentralized network free from external constraints. However, the current trend of block builders selectively processing transactions, particularly censoring addresses linked to U.S. sanctions, challenges the fundamental principle of Ethereum’s decentralization. While some argue that this censorship is a necessary measure for legal compliance, critics contend that it contradicts the core values upon which Ethereum was built.

In light of these concerns, Ethereum’s leadership is actively considering measures to address the growing trend of censorship. Vitalik Buterin, a prominent figure in the Ethereum community, has put forth proposals for updates that aim to restrict transaction blocking by validators and builders.

This challenge to Ethereum’s decentralized ethos presents a pivotal moment for the community, prompting a reflection on challenging questions regarding the technology’s limits and future trajectory. The decisions made in response to these concerns will likely shape Ethereum’s ability to evolve while staying true to the core principles upon which it was originally founded.

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Cryptocurrency is essentially virtual money that operates in a decentralized manner, not through a bank but directly on multiple independent computers.

Every cryptocurrency has two main components: the units of digital exchange called “coins” and the network within which the exchange takes place. These units can be transferred between wallets and exchanged on exchanges. The networks in which these coins exist are called blockchains, which translates to “chains of blocks.”

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