Evolution of Ethereum Decentralization by Kseniya Lifanova

about the evolution of Ethereum decentralization. So I don't know how many of you here have read Camila Russo's book the infinite machine. Uh it's a great book. I feel like it should be a requirement to come to this conference but it tells the story of how Ethereum came to be. It talks about its chaotic beginnings.

Um takes us through its launch and how it really came to be one of the most important blockchains that exists today. So this quote is from the book and it speaks to how Vitalik was thinking about Ethereum in the early days. He envisioned a computer that could simultaneously live in all the nodes of an enormous global network which would be able to process anything you threw at it without downtime or interference. So developers could build whatever they dreamed of and nobody would be able to stop them or their applications like an infinite machine. So this quote really highlights the end goal.

You know what we're all working towards. Uh, as everyone says, decentralization is a journey and that's what we're going to talk about today. Just a quick agenda. We're going to go over the history of Ethereum. Uh, take a look at some statistics today.

Talk about what I believe is the real problem. Look at solutions and then the future. And then a quick introduction of myself, who am I and why should you care about what I say. I'm the VP of decentralized strategy and engineering at Foundry. I got into this space in 2017.

Um, before foundry, I owned a web 3 tech consultancy with my business partners and about 25 engineers and we built solidity applications on Ethereum. So, Ethereum has been my thing for for a while. And then Foundry, our mission is to empower a decentralized infra uh empower a decentralized infrastructure. Half of our business is focused on proof of work. We run the largest Bitcoin mining pool in the world and then the other half uh we focus on proof of stake and we provide digital asset staking services and advisory uh services to institutions with a big focus on ETH staking.

Okay, we're going to go through some Ethereum history. So Ethereum was launched in 2015 as oh sorry as a proofof work chain. Uh however, Vitalik was already thinking about proof of stake. He actually wrote an article that was published in Bitcoin magazine in August of 2013 titled what is proof of stake and why it matters. And in it he argues that bitco uh proof of proof of work was a good uh option in the beginning but now years later after cryptocurrency exists we can now build protocols that build off the cryptocurrency itself.

Uh so proof of stake is an excellent example of that and in the article he asks does proof of stake have a future which I thought was very preient of him. So we won't go too much into the difference of proof of work and proof of stake. Uh but as most of us know one of the most compelling reasons for proof of work is that it's more energyefficient. So there's no need to use lots of energy for proofof work computations. Instead, validators state capital as a form of collateral that can be lost if the validator acts dishonestly or lazily.

The other compelling reason for proof of stake is that it lowers the barrier to entry. So, you no longer need to go out and purchase expensive hardware that you might need to replace in a few years. uh all you need is a computer, internet connection, and 32 ETH, which I know is still a big investment for a lot of people, but it really does open the door for more participation um of a much much larger group of people. And the more people that participate, the more nodes we have leading to greater decentralization, less centralization. And then some milestones um again launched in 2015 as a proofof work chain.

The beacon chain which is the proof ofstake chain was launched in December of 2020. And then finally the long-awaited merge happened last fall September of 2022. So big milestones that are leading to greater decentralization for the Ethereum network. So before we look at some validator statistics, I actually was curious about mining statistics because it's not something that I had thought about. Um so I I was searching around.

It's actually pretty hard to find data on on Ethereum miners, but I did find this report that was compiled by Consensus and Codefi uh the Codefi data team. So the graph on the left you'll see the orange line is uh are the minor counts and the blue line is minor payout addresses. So individual minor payout addresses and you'll see the large drop in 2016 and kind of stay steady and then the number of uh minor payout addresses is increasing. Then the graph on the right uh shows mining pool block production. And you'll see that the number uh oh sorry the percentage of blocks mined by mining pools increased from 70% in 2016 to 90% in late 2017.

And there's another graph that shows the block rewards attributed to mining pools. And that also increased from 71% to 97% in 2017. So, it's showing a drastic increase of mining pool influence while the number of pools actually decreased. So, I thought that was an interesting kind of um statistic that shows some centralization with the Ethereum miners. And then this next graph shows the flow of funds from the largest mining pools from 2017 to 2020.

It's called the Sani diagram. So the blue are the largest mining pools and you'll see that over, you know, years of payouts, uh, those payouts were actually consolidated between eight eight addresses. So there's some kind of customer payout centralization there as well. Okay, now we're going to move on to where we are today. Looking at Ethereum validator stats, this these numbers are a week old, so they might be a little off.

Uh we're at 538,000 validators. The number has been steadily increasing since uh the the beacon chain was launched with about 100,000 depositor addresses and 16.8 million ETH deposited, which is about 15% of all of the ETH that exists today. And then if we look at the breakdown of the validators, we'll see that Lido um a liquid staking provider manages 163 validators. So taking up 30% of the market share.

Coinbase coming in second with 64 uh,000 validators taking up 12%. Kraken and Binance and and a few others. And then another way to look at it is altogether staking as a service providers account for 72% of all the staked ETH. Again, 43% of the staked ETH is managed by Lido and Coinbase. So I know looking at these percentages and these graphs at face value it might seem alarming right does this look like the decentralized system that we all envisioned uh but if you take a more nuanced look uh it it really is less of a concern so I wanted to focus on Lido since it has 30% of the market share uh today Lido has 29 whitelosted whitelisted node operators that are voted in through a DAO they're all professional organizations Um, so all of those validators are actually split across these 29 node operators.

No single entity controls more than 54 5.14% of Lido staked ETH. And that's not more than 1.5% of staked ETH today. So to attempt a 51% attack, you really need collusion between all of these node validators as well as two other of the major uh validators.

So the risk is I think not as high as it might seem. Um and if there if these entities did collude of course the remaining honest validators could decide to keep building on the minority chain and ignore the attackers fork. Moving on to geographical distribution of nodes. So the US controls 55% of the nodes globally and uh Germany coming in second at 15% of the nodes globally. Um, so this is really important.

If we had all of the ETH nodes in China, for example, that government could shut down the network. So the more distributed nodes are across countries, uh, the less of a risk uh, that there is because if one government is trying to shut down the network, they would have to work with the other governments and we all know how governments are uh, not great at working together. So highly unlikely. Uh, but definitely a little bit of centralization here. I think, you know, we can do better.

Now looking at infrastructure which I think is the the highest risk. So looking at Ethereum validator clients we have GE and Prism. GE um is taking 76% of of um the market with execution clients and Prism 42% of the consensus clients. So a little bit of centralization there. And then the the graph the the circle all the way to the right is showing where all of the nodes are deployed.

And so this is another thing that I never really thought about until I started working at an infrastructure company. So I was pretty shocked to find out that 70% of ETH nodes are hosted in centralized uh data centers, 50% in AWS and 20% in Hner, Google and OVH. So again, I think this is really the the highest risk um and kind of antithetical to the whole point of decentralization because we're taking these nodes that are supposed to be running a decentralized network and putting half of them into a very centralized organization that could pull the plug on their uh blockchain infrastructure and really disrupt the network. So I think this is out of all of the risks that we looked at, I think this one really is the the most important one to kind of focus on. Okay, so now we're going to look at some solutions and what we can do better.

First being uh more node operators. So again the pie chart on the left is where we are today and then the pie chart on the right is I think where we can get to. So, Foundry of course coming into the space with uh providing ETH staking. We definitely want a piece of the pie. Um we want to be there to service institutional clients.

I know in this ideal world, everyone has an ETH validator at home. Um but that's just it's not realistic, right? Like we definitely need need individual node operators um and more of them. Uh but we also need companies like Foundry and other large node node providers that are able to service institutions. Um you know banks one day will want to will want to stake their ETH and companies like Foundry will be there to be able to support that infrastructure at scale getting off the cloud.

Right? So at Foundry, we are deploying all of our ETH validators and other validators that we work with on bare metal machines that we own and control uh across different data centers. Um so yeah, moving anything that we have off of Amazon to bare metal machines. This is something else that you know other node operators can do as well to make the system more resilient. And then the picture below the the servers is uh the picture of the hardware that I purchased with my business partner.

Uh we pulled our ETH and set up a validator a couple years ago. So if you're an individual node operator and you have your uh ETH validator deployed on Amazon, I highly encourage you to spend like a $1,000 on some hardware and spend a fun weekend deploying your validator and uh running it on your own uh infrastructure. and then distributed validator technology. So this is the next kind of big thing after the merge. Um uh distributed validator technology, it's a decentralized open- source protocol that allows the duties of a validator to be distributed among multiple nodes as opposed to a single machine.

Uh so rather than running the one validator, you have a cluster of machines that are doing the work of of one validator. And this will improve validator participation which will lead to great uh greater stake decentralization. And the reason why it's going to improve validator participation is it really alleviates some of the risks that all types of node operators uh experience. So as an individual node operator, you run the risk of your machine going down and missing rewards. This has happened to my validator.

Um, so if you have a cluster that make up that one validator, if one of the machines goes down, you still have the three others. So it really kind of removes the single point of failure there. And then for large node operators, um, you know, you probably have automated scripts to redeploy a validator if it goes down, but you do run the risk of maybe having two validators signing with the same keys, which could lead to slashing. So if you set up a distributed validator technology, you can prevent uh that from happening. Uh and then of course, yeah, building redundancy for the larger providers, allowing more operator participation for liquid staking providers as well.

And then the future. So in the future, we do see Foundry being a major player in ETH staking and supporting institutions. Um, a couple things that we're excited to kind of announce is our again our our ETH staking solution that we're launching later this month. Um, also we're supporting a couple of the liquid staking providers. Since our focus is institutions, this allows, you know, retail to get in and use some of the infrastructure uh that Foundry runs.

So, we're supporting Stakewise, B3 test net, and uh participating in a Lido DBT pilot. Um and then of course the proliferation of L2s and rollups you know we hope will lead to more mainstream uh mainstream adoption in the world and all of the things that we talked about. So we need more diversity, node operators, uh clients, geographical locations where nodes are deployed and infrastructure. Uh and of course we see we hope to see more of you running ETH validators and staking your ETH uh with decentralized staking providers such as Lido, Rocket Pool and Stakefish and any other ones that I didn't mention. Um so yeah, if we can do all this then we can get Ethereum to a more decentralized network.

And a little early. Thank you. Um, if you have any questions, our booth is, I think, back this way. So, come by and, uh, we can chat. Thanks.

[Applause] [Music]