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This Redditor Says Ethereum Proof of Stake Is a Regressive Capital Tax – He Could Be Right

Ethereum 2.0

SenatusSPQR, a Reddit user, is the most recent person to issue a scathing critique of the PoS consensus mechanism, covering everything from staking’s practicality to the mechanism’s security concerns.

The Reddit user has criticized the new proof-of-stake (PoS) consensus mechanism as being detrimental to most low-income stakers who don’t have the minimum 32 ETH required to run their independent nodes on the blockchain.

Ethereum Stakers Aren’t Equal

Before the Ethereum blockchain transitioned to PoS, the consensus mechanism was heavily criticized. The Ethereum Foundation continued with the transition despite the mounting worries, and the process was completed last Thursday, much to the satisfaction of engineers.

Ethereum Staking

However, Reddit user SenatusSPQR is dissatisfied with the current state of things. Senatus explained in an online forum post that PoS creates a regressive tax system where the rich earn even more money at the expense of the poor.

The user classified Ethereum blockchain stakers into four tiers, ranging from Tier 1 stakers, who have computers running nodes and are comfortable staking 32 ETH (approximately $50,000), to Tier 4 users, who have less money, stake their coins on exchanges and earn little rewards.

Staking Fee Structure Isn’t Realistic

SenatusSPQR’s main complaint is about transaction fees on the Ethereum blockchain. According to him, the blockchain doesn’t care how much money investors have in their Ethereum wallets; if they pay higher transaction fees, their transaction is prioritized over someone who pays less. This is disadvantageous for smallholders who must pay similar transaction fees to their larger-holder counterparts.

The Reddit user also said that cryptocurrency staking and unstaking are both Ethereum blockchain transactions. They will incur fees, which will particularly eat into Tier 3 and 4 stakeholders’ profits.

Stakers with 32 ETH must only pay a one-time fee of about 0.05 ETH to set up their nodes. Holders who need to stake using protocols or exchanges, on the other hand, must pay a 0.05 ETH transaction fee to begin staking and unstaking. This, combined with the 10% to 15% of their profits that will be sent as staking fees, means they will lose a significant amount of money.

His suggested solution is to reduce transaction fees and staking rewards, as well as to lower the barriers to entry for new, individual stakers on the Ethereum network.

Challenges with Centralization

Staking fees aren’t the only area in which the Ethereum blockchain has been chastised. Many experts expressed concern in the run-up to the Merge that staking – and Ethereum’s stringent requirements for node validators – could lead to increased centralization on the blockchain.

Earlier in September, data gathered by industry news sources revealed that there were 422,000 unique network validators on Ethereum’s Beacon Chain. These validators had staked approximately $22.3 billion. 33% of this amount was held in Lido Finance, a staking protocol allowing anyone to stake without holding up to 32 ETH. Another 15% was held by Coinbase, with 8% and 7% held by Kraken and Binance, respectively.

These platforms now wield significant sway on the Ethereum network due to the amount of ETH they hold. The platforms have effectively become stakeholders, ensuring they have a say in the long-term future of the Ethereum blockchain. Small stakers have essentially been frozen out, with no choice but to increase their staking holdings or maintain the status quo by participating in staking protocols.

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