Ethereum may now be more vulnerable to censorship — Blockchain analyst

Ethereum’s upgrade to proof-of-stake (PoS) may make it more vulnerable to government intervention and censorship, according to the lead investigator of Merkle Science. 

Speaking to Cointelegraph following the Ethereum Merge, Coby Morgan, a former FBI analyst and the lead investigator for crypto compliance and forensic firm Merkle Science, expressed his thoughts on some of the risks posed by Ethereum’s transition to PoS.

While centralization issues have been broadly discussed leading up to the Merge, Moran suggested the prohibitive cost of becoming a validator could result in the consolidation of validator nodes to the bigger crypto firms like Binance, Coinbase and Kraken.

In order to become a full validator for the Ethereum network, one is required to stake 32 Ether (ETH), which is worth around $47,000 at the time of writing.

A pre-Merge report from blockchain analytics platform from Nansen earlier this month revealed that 64% of staked ETH is controlled by just five entities.

Morgan continued to say that these larger institutions will be “subject to the whims of governments in the world,” and when validator nodes identify sanctioned addresses they can “be slashed rewards and then eventually kicked off the system,” with businesses prevented from interacting with them:

“Either you will comply and you will siphon off that sort of interaction […] or you run the risk of being fined, being scrutinized, or potentially being sanctioned yourself.”

Vitalik Buterin spoke about this risk in an Aug. 18 developer call, suggesting one of the forms censorship could take is validators choosing to exclude or filter sanctioned transactions.

Vitalik went on to say that as long as some validators do not comply with the sanctions, then these transactions would eventually be picked up in later blocks and the censorship would only be temporary.

On Aug. 8, crypto mixer Tornado Cash became the first smart contract sanctioned by a United States government body.

Related: Rep. Emmer demands an explanation of OFAC’s Tornado Cash sanction from Sec. Yellen

In reaction, various entities have complied with the sanctions and prevented the sanctioned addresses from accessing their products and services.

The development has had a large effect on the Ethereum community, with EthHub co-founder Anthony Sassano tweeting on Aug. 16 that he would consider Ethereum a failure and move on if permanent censorship occurs.

I want to be very clear on this:

If the Ethereum base-layer ends up engaging in *permanent* censorship then I will consider the Ethereum experiment a failure and I will move on.

Thankfully, I believe the Ethereum community is strong enough to fight off base-layer censorship.

— sassal.eth (@sassal0x) August 16, 2022