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Vitalik Buterin Suggests New Way To Decentralize Ethereum Staking

Ethereum staking faces a growing concern regarding centralization, yet Vitalik Buterin, the network’s co-founder, unveiled a new approach to tackle this issue on Tuesday.

In his recent blog post, Buterin proposed a modification to the penalty system for Ethereum validators, aiming to elevate the consequences of collusive misbehavior.

Penalizing Centralized Ethereum Staking

Specifically, the proposed method would enforce significant penalties on validators found to be misbehaving – even inadvertently – in the event that a substantial portion of separately staked ETH engages in misbehavior simultaneously.

Buterin elaborated on the concept, stating, “The theory is that if you are a single large actor, any mistakes that you make would be more likely to be replicated across all ‘identities’ that you control, even if you split your coins up among many nominally separate accounts.”

In September 2022, Ethereum transitioned to a proof-of-stake consensus mechanism, enabling users to earn yields on their ETH by locking their coins within the protocol. This transition also grants control over block validation and transaction processing to those who possess the most ETH.

This group encompasses centralized exchanges and staking service providers such as Lido, Coinbase, and Binance, which offer pooling services for smaller investors’ ETH to stake on their behalf. Even asset management firms like Fidelity are exploring the utilization of users’ assets for staking purposes.

The rise of these practices has sparked concerns within the community regarding the potential collusion among major Ethereum validators to orchestrate a hostile takeover of the network, particularly under external pressures such as government intervention. Notably, JPMorgan highlighted in October that Ethereum’s Merge and Shanghai upgrades have contributed to increased centralization concerns.

Buterin’s War On Large Ethereum Validators

While significant Ethereum validators already face heightened “slashing” penalties – direct reductions to a validator’s stake – compared to smaller stakers, Vitalik emphasized that penalties for such rare occurrences are insufficient to address centralization concerns.

Explaining further, he stated, “This post proposes extending a similar anti-correlation incentive to more ‘mundane’ failures, such as missing an attestation, which nearly all validators experience at least occasionally.”

In theory, such a system could introduce economic disincentives to centralized staking practices and potentially mitigate economies of scale within the industry.

In addition to this proposal, Buterin recently introduced a “rainbow staking” system aimed at categorizing Ethereum stakers based on their objectives.

This system aims to alleviate the economic and technical burdens associated with independent staking, which currently demand “everything of everyone,” consequently leading ETH investors to opt for centralized staking services.

“We have become excessively reliant on ‘social pressure + virtue’,” he remarked earlier this month regarding centralized staking providers. “If inevitability persists, we ought to clarify whether we depend on incentives or social pressure + virtue, rather than excessively relying on the latter.”

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