Proof of Centralization: Ethereum’s rich-get-richer Merge countdown

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With Ethereum’s transition to a proof-of-stake (PoS) consensus mechanism set to occur this week, fears are growing over the (even more) centralized reality that rank-and-file users will face.

The ‘Merge,’ aka Ethereum’s highly anticipated, long-delayed transition from a proof-of-work (PoW) to a PoS consensus mechanism, is scheduled to take place later this week (possibly only hours away by the time this is published). The ‘crypto’ world is watching with baited breath to see whether this rocket will boost Ethereum to the heavens or spectacularly flame out like Jeff Bezos’ Blue Origin rocket the other day.

Fortunately, Bezos’ comically phallic projectile was unmanned but Ethereum’s rank-and-file users don’t have the option of totally sitting out this experiment. Apprehension over the Ethereum Foundation’s capacity to pull off this PoS switcheroo mid-flight resulted in significant outflows from ETH-based investment products this week as investors fled to fiat in case a wonky O-ring went unnoticed by those tinkering with Ethereum’s engines.

The Ethereum Foundation has been keen to hype the alleged environmental benefits that the Merge will offer, while playing down the inconvenient truth that the transition will do little to alleviate Ethereum’s infamous network congestion. But Vitalik Buterin & Co. are even less keen to spotlight the Merge’s elevation of Ethereum insiders (including Buterin) from mere power brokers to outright oligarchs.

Putting the ‘stake’ in ‘mistake’

For the uninitiated, Ethereum’s PoS system allows individuals to ‘stake’ 32 ETH (currently worth around US$51,000) in order to become ‘validators’ of network transactions. This steep entry cost automatically leaves most ETH holders on the outside looking in, although the proles can collectively pool their meager holdings to buy one shared pair of big-boy validator pants.

For those with deeper pockets, there’s no limit to how many of these groups of 32 ETH any individual or entity can operate. And since the new PoS system randomly selects stakers to handle the creation of new blocks, having more than one stake—and possibly many, many more—greatly increases the likelihood of hearing your number called.

Remember that Ethereum was subject to a highly controversial pre-mine that rewarded Foundation members and their venture capital bagmen with tens of millions of ETH. The opportunity to weaponize these mountains of unregistered securities is now at hand.

A 2/3 consensus in ETH is NOT based on nominal validators, it's based on deposit size.

Currently the top 100 holders of ETH control ~40% of network 'wealth'.

Extrapolate out…

How many ETH holders control 2/3 of the network?

That's who enforces the network.

3/ pic.twitter.com/v9anxWqTQY

— Rob W. (@BikesandBitcoin) September 12, 2022

The sheer scale of this concentrated power sometimes goes unremarked but the top 100 Ethereum addresses control nearly 40% of all ETH in existence, while the other 205,204,280 holders make do with the rest. Obviously, some of these overburdened addresses are exchanges and other ‘crypto’ services but a good chunk of them are simply ETH whales who don’t really do much with their stacks, almost as if they’ve been waiting for some golden opportunity to leverage their inborn advantage to the maximum extent possible. And here we are…

Following the Merge, these whales will be the ones reaping the ETH rewards for maintaining the network, a process known elsewhere as ‘the rich getting richer.’ It’s the height of irony that a network founded by an individual who makes Jughead look positively pudgy seems so intent on creating a legion of fiscal Jabba the Hutts.

While PoS Ethereum will feature a ‘whistleblower’ rewards system and financial penalties for validators who color outside the lines, ETH whales will nonetheless face major temptation to use their dominant validator status to play fast and loose with the rules. The opportunity to prioritize one transaction making it into a block before another could enable some opportunistic front-running while still maintaining a façade of propriety. Particularly if one controls such a quantity of staking positions that your other stakes are voting on the validity of the transactions in the block you’re proposing.

What moron bases a reward system on doing work?

Besides rank-and-file users naively expecting improved network security, faster processing times and less outrageous transaction fees, the biggest losers of Ethereum’s Merge are the PoW blockchain miners who previously supplied network consensus. Their unceremonious ouster has led Ethereum miners to propose a hard fork off the existing Ethereum chain using an ETHW token based on PoW. Early support for this proposal came from a handful of exchanges, including BitMEX, Huobi and Poloniex.

But some other major entities very quickly expressed sole support for the PoS chain, including NFT bigwigs like OpenSea and Yuga Labs, along with stablecoin issuers Circle and Tether. These declarations that certain assets won’t be recognized on an ETHW chain undoubtedly gave pause to those who might have expressed interest in sticking with the devil they knew, and are perhaps further evidence of how few voices need to be heard to ensure Ethereum takes its leaders’ preferred path.

Assuming that the Merge doesn’t go the full Bezos, the only thing the Ethereum Foundation will be talking about in the coming weeks will be the supposed energy savings that the switch to PoS will produce. While that might save Buterin’s reputation for a while, a pointless product drawing any amount of energy is a waste of said energy, and make no doubt about it, Ethereum is as useless as a glass hammer.

IMPORTANT NOTICE: Along with the ETHMerge the ETH Energy Consumption Index will be updated to reflect a new guesstimate for PoS Ethereum while completely ignoring provably scalable PoW implementations such as BSV exist.

Expected trade of security for false sustainability: 100% https://t.co/93LUTchOWf

— Bryan Daugherty (@BWDaugherty) September 13, 2022

Because Ethereum doesn’t scale. Yes, those options are coming later (once they actually fix on a winning strategy), but since the Merge has been six years in the making, actually delivering a scaling solution might not happen until Barron Trump is president.

The thing is, there’s nothing inherently wasteful about a PoW consensus, provided it’s on a blockchain that scales to a level that justifies its energy consumption. Bitcoin SV (BSV) is such a beast, having been dubbed the most efficient blockchain by Canadian accounting firm MNP, due to its capacity to pack millions of transactions into individual blocks while imposing transactions fees measured in fractions of a cent.

Dr. Craig Wright, the real-world figure behind the Satoshi Nakamoto pseudonym credited with authoring the 2008 Bitcoin white paper, has gone on record in predicting that BSV will ultimately absorb Ethereum-based operations, which will have no choice but to abandon their non-scaling ship for something with a little more elbow room.

That is, until Ethereum heralds its bold new Proof of Tinkerbell Effect system, which will require all users to clap as loudly as they can so the validators know the proles truly believe that their transactions will make it into a block someday. Hey, it worked! And now to rescue Wendy!

Watch: The BSV Global Blockchain Convention panel, The Future World with Blockchain