Since Ethereum was proposed by Vitalik Buterin in 2013, it has undergone several significant developments. Initially based on the PoW (Proof of Work) mechanism, its design allowed miners to earn rewards through computational power consumption. However, the high energy consumption and transaction speed bottlenecks of PoW prompted Ethereum to gradually transition to the Proof of Stake (PoS) mechanism, rolling out a series of improvements, including The Merge, Shanghai upgrade, and Cancun upgrade. The core goals of these upgrades are to enhance network efficiency, reduce energy consumption and gas fees, and make the Ethereum ecosystem more suitable for decentralized applications.
Although these upgrades have made some progress, they have also brought new challenges. Especially in terms of governance centralization, economic incentive structures, and technical implementation difficulties, Ethereum faces a series of structural defects that may impact its decentralized philosophy and long-term development. This paper will analyze the potential risks to the Ethereum ecosystem based on the core defects of the upgrades.
I. The Original Intention of Ethereum's Upgrade: Efficiency and Scalability Brought by PoS
Ethereum initially adopted the PoW mechanism, which, while ensuring the security of the network, gradually revealed high energy consumption and scalability bottlenecks. As the number of users and transactions increased, the resource consumption and congestion issues of the PoW mechanism became more pronounced. To improve energy efficiency, reduce transaction costs, and increase network speed, Ethereum completed the 'Merge' upgrade in 2022, transitioning the consensus mechanism from PoW to PoS.
The introduction of the PoS mechanism aims to replace the energy-intensive mining process with 'staking' ETH. Stakers gain validation rights and rewards by locking ETH in the network, significantly reducing energy consumption and alleviating some resource competition issues brought by the PoW mechanism. Additionally, Ethereum has also adopted various strategies concerning scalability, including the introduction of Rollup technology and sharding plans, aiming to enhance transaction processing capabilities by moving some computations and data processing off the main chain or dividing them into different shards.
However, despite these technological upgrades theoretically bringing greater efficiency and lower energy consumption, Ethereum's PoS mechanism and scalability plan have also raised a series of issues such as centralization and vulnerabilities in the economic structure, which may affect the decentralized essence of the network and have far-reaching impacts on Ethereum's future development.
II. Centralization Risks of PoS
After transitioning from PoW to PoS, Ethereum conducts network validation through staking ETH. The validation weight of a node directly depends on the amount of ETH staked, meaning that large holders or institutions with substantial ETH can gain a greater voice in network governance. Although this mechanism reduces energy consumption, it inevitably raises concerns about network centralization.
Currently, there is a significant centralization trend in Ethereum's staking ecosystem. For example, large staking service providers like Lido and Coinbase control a substantial amount of ETH in staking pools, leading to the gradual centralization of network governance and validation rights among a few nodes. The risk arising from this is that Ethereum's governance is gradually leaning towards oligopoly, which not only weakens the participation of ordinary users and small nodes but may also lead to governance deviating from the original intention of decentralization. More seriously, if these few large nodes choose to withdraw in the future for economic, political, or technical reasons, the stability of the entire network will face significant challenges.
Moreover, the centralization of the staking structure also brings potential security risks. If large staking nodes control too many validation rights, it could create a 'single point of failure' for the Ethereum network; once attacked or faulted, the overall security and reliability of the network will be threatened. This risk makes it difficult for Ethereum to achieve true decentralization under the PoS mechanism.
Another point of concern is that Ethereum developers plan to activate the Pectra upgrade on the mainnet in the first quarter of 2025. The EIP 7251 proposal in this upgrade will increase the maximum effective balance of validators from 32 ETH to 2048 ETH and allow existing validators with a maximum effective balance of 32 ETH to consolidate their stakes. This is expected to significantly reduce the number of validators on Ethereum and exacerbate centralization issues.
III. Economic and Security Defects of the Rollup Structure
Another key strategy for Ethereum in recent years concerning scalability is the adoption of Rollup technology. Rollup is a technique that processes transactions in layers, moving some computations and data processing off the main chain to improve transaction speed and processing efficiency. Although Rollups can theoretically alleviate Ethereum's scalability issues effectively, their complex economic structure brings new risks.
The design of Rollups requires the establishment of a complex incentive mechanism to ensure the liquidity and security of the network. The current Rollup ecosystem relies heavily on external staking and financial support, making the entire system exhibit high vulnerability in times of economic fluctuations. Once market volatility occurs, the liquidity of funds within the Rollup ecosystem may be severely affected, leading to declines in user experience and network stability. The dependency of Rollups on the main chain also means that when issues arise on the Ethereum main chain, the Rollup ecosystem will be impacted as well.
Moreover, the economic model of Rollups has not been validated by long-term market performance. Projects based on Rollup solutions, such as OP Mainnet, Arbitrum, Base, Starknet, Zksync, Linea, and many other L2 projects, suffer from poor interoperability leading to a suboptimal user experience, and their functionalities highly overlap with those of the main chain.
Previously, the main function of ETH was as a settlement layer, with large DeFi settlements occurring on the main chain, which has now led to a significant amount of demand being diverted to L2. The L2s that 'parasitize and drain' Ethereum have siphoned liquidity away from Ethereum while providing little value capture back to Ethereum, severely impacting Ethereum's liquidity and on-chain transactions, leading to stagnation of the ETH mainnet, ongoing internal disputes, and gradual disintegration of community consensus. Data shows that Ethereum's revenue and ETH supply destruction volume significantly decreased after Dencun. Total revenue is 69% lower than the average of the 150 days before the upgrade; the amount of ETH destroyed is 84% lower than the average of the 150 days before the upgrade.
In terms of security and stability, the architecture of Rollups includes sequencers as core components of the L2 network nodes, responsible for receiving transaction requests, determining execution order, batching them, and passing them to L1 smart contracts, thus significantly improving transaction processing efficiency and user experience. However, if a sequencer crashes or errors before completing this process, the user's transaction will remain in L2 and not be completed in L1. It is easy to see that the use of a single sequencer may face risks such as transaction delays, crashes, and downtime, and indeed, such situations have occurred.
This centralized sequencer will significantly weaken Ethereum's mainnet's control over L2 in terms of the settlement layer, making it prone to risks such as maliciously censoring user transactions, errors, extracting MEV, front-running, traffic fragmentation, and even forced downtime (as seen with Linea and Blase, which directly shut down due to asset theft), thereby impacting the stability and security of the entire Rollup system. In summary, this centralized design grants excessive power to the sequencer, which has become a focal concern in the industry.
IV. Future Potential Risks: Balancing Technical Difficulty and Decentralization
In the future, Ethereum also plans to further enhance network performance through sharding technology. However, sharding, as a scaling solution that breaks down the network into multiple small segments, poses significant technical challenges, requiring the achievement of data consistency and security across different shards. The successful implementation of sharding not only needs to overcome technical difficulties but also involves weighing security against scalability. This technical complexity may lead to poor data synchronization between shards and, in extreme cases, trigger network splits.
Additionally, the combination of sharding and Rollup makes the governance and economic structure of the network more complex. The distribution of shards and the design of Rollups impose higher data consistency requirements between each shard and Rollup, presenting more technical challenges for developers and node validators. If the parallel use of sharding and Rollups fails to balance decentralization and performance improvements, it may lead to a decline in user trust and even cause community splits.
Overall, Ethereum, in its continuous pursuit of technological innovation, inevitably faces the dilemmas of centralization, economic fragility, and technical complexity. These issues not only affect the ecological development of Ethereum at this stage but also lay risks for future upgrades.
