Sep 14, 2022 - Economy

Ethereum Merge raises stakes amid specter of censorship

Illustration of a blockchain cube disintegrating into pieces.

Illustration: Gabriella Turrisi/Axios

The monumental change for the Ethereum blockchain, known as The Merge, ups the ante for ether stakers as execution risk gives way to concentration risk.

Why it matters: 64% of staked ether currently resides with five entities, according to a report from Nansen, a blockchain data firm. And centralized exchanges are poised to ramp up ether staking following the Merge as their customers look to collect yield on coins — a trend that raises the specter of censorship.

  • Centralized exchanges are required to comply with regulatory guidance in the jurisdictions they operate. And they operate as standalone validators on the blockchain, making them more susceptible to censorship.
  • By contrast, the decentralized autonomous organization (DAO) Lido — a major player in ether staking — outsources the running of validators.

The big picture: With centralized exchanges poised to snap up greater market share, it becomes paramount for decentralized ether staking providers to hold the line. (Recall our primer on how transactions might be censored after The Merge.)

State of play: Lido currently holds a roughly 91% market share of liquid staking derivative platforms, excluding centralized exchanges, and holds about 30% of all staked ether, according to Nansen.

Yes, but, the Big 3 centralized exchanges combined grew their volume of staked ether 5x that of Lido over the past three months, according to a recent Nansen report. Here's the amount of ether staked on each platform over that time:

  • Coinbase: 116,000 ether
  • Binance: 59,000 ether
  • Kraken: 43,500 ether
  • Lido: 41,000 ether
  • Rocket Pool: 35,000 ether

The other side: DAOs, while decentralized, are not immune to the threat of indirect censorship, Nansen wrote.

  • Lido's governance token, LDO, has concentrated ownership — with the top nine wallet addresses holding roughly 46% governance power, according to Nansen.
  • Worth noting: "Smart Money" token wallets — which include investors like VC firms and other influential interests that could be more incentivized to censor — collectively own 152 million LDO tokens, a little over 15% of the total circulating supply, according to Nansen.
  • The question of whether owners of LDO would use that influence to exert influence over validators is, for now, theoretical. And it's worth noting that Lido has already proposed a dual governance model.

The bottom line: There are pitfalls, of course to that model, raising the issue of...execution risk.

Go deeper