Goran Radanovic
The Ethereum Merge may make the network more environmentally friendly, but it could pose a great risk to decentralization, an element more concerning to the crypto community.
The Impact of Ethereum Merge
Ethereum’s desire to change its consensus mechanism from proof of work to proof of stake is an event the crypto community has anticipated for years. We’re hours away from the official migration, but some investors are worried.
The motivation behind the project is to develop a network consuming less energy, making it more environmentally friendly and to further scale the Ethereum ecosystem. Its blockchain will migrate to proof of stake validator nodes, but no change should apply to Ethereum-based applications.
Yet, many investors are concerned about the Ethereum Merge causing centralization problems.
Limited Staking Liquidity
Moving over to proof of stake will require stakers to lock in their coins so that validators can verify transactions. A major problem is that only around 11% of Ethereum (ETH) is currently staked. An even bigger concern is that 5 entities stake 64% of ETH.
Nansen’s report revealed that Lido’s 31% staking portion is the biggest. Popular exchanges Coinbase, Binance and Kraken have a combined 30% share. Although Lido is decentralized organization making up 47% of the ETH liquid staking solution market and 90% of the liquid staking market, some investors are worried it could be censored and exposed to centralization risks.
Due to high energy costs and expensive hardware to mine crypto, proof of stake provides a cheaper alternative but could be intrinsically centralized.
Many stakers choose third parties such as exchanges to earn the highest rewards or choose liquid staking. Regardless of which method stakers choose, ETH’s 11.3% staking pool pales in comparison to Polygon (41% staked) and 77% of Solana staked.
Penalties are another factor making staking less attractive. Validators that aren’t active for a few days receive a minor penalty, but funds are slashed for those attesting to an invalid block.
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This article was written for Business 2 Community by Goran Radanovic.
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