According to Cointelegraph: Ethereum co-creator Vitalik Buterin has raised concerns over the centralization of block production and staking within the Ethereum network. In a recent post dated October 20, Buterin suggested several measures to mitigate staking centralization, which he sees as a growing risk to the network’s security and decentralization. These proposals are part of Ethereum’s ongoing efforts during its "Scourge" phase, aimed at addressing emerging technical and governance challenges.

Key Concerns Over Ethereum Staking Centralization

Buterin’s warning comes after observing that economies-of-scale within staking have led to smaller staking pools merging with larger ones, a trend that has resulted in two entities producing 88% of Ethereum blocks in the first two weeks of October. This centralization, Buterin argues, could eventually lead to transaction censorship and other systemic risks.

According to Buterin, while 30% of Ether (ETH) staked is enough to protect the network against 51% attacks, increasing centralization presents other potential threats. He cautioned that further consolidation of staking pools could reduce the effectiveness of the slashing mechanism, potentially allowing a dominant liquid staking token to negatively impact network effects.

Proposed Solutions to Combat Staking Centralization

1. Capping Ether Staked

Buterin suggested introducing caps on the amount of Ether a user can stake, aiming to prevent dominant entities from exerting too much control over block production. This measure would help distribute staking power more evenly across smaller participants, limiting the risk of centralization.

2. Two-Tier Staking Model

Buterin proposed a two-tier staking model consisting of:

• Risk-bearing (slashable) staking: Where users would face potential penalties for misconduct or network breaches.

• Risk-free (unslashable) staking: A more conservative option where stakers wouldn’t face the risk of penalties, offering an alternative to those less willing to take on potential slashing risks.

3. Limiting Staking Penalties

To avoid discouraging participation, Buterin also proposed limiting staking penalties to 12.5% of staked Ether. This would ensure that while stakers remain accountable, the financial risks would be manageable, incentivizing more decentralized staking participation.

Current Centralization: Key Stakeholders

Ethereum Foundation researcher Toni Wahrstätter echoed Buterin’s concerns, revealing that two block builders, Beaverbuild and Titan Builder, were responsible for constructing 88.7% of Ethereum blocks in early October. This concentration poses long-term risks to the network’s decentralization and could reduce its resilience to external attacks or censorship.

Addressing Proposer-Builder Separation Issues

The current proposer-builder separation method on Ethereum has inadvertently contributed to these centralization issues. Buterin warned that it could lead to extended block inclusion times, stretching from the typical 6 seconds to as much as 114 seconds. This delay opens the door to sandwich attacks, where block builders extract user revenue or manipulate decentralized finance (DeFi) liquidations.

To address this, Buterin suggested two main solutions:

1. Fork-Choice-Enforced Inclusion Lists

Under this model, the responsibility of choosing transactions would shift back to the proposer or staker, leaving the builder only in charge of transaction order. This would reduce the control that centralized block builders currently hold, giving stakers more influence over the network.

2. BRAID Proposal

The BRAID proposal aims to divide the block production process among multiple actors. Each actor would require only a medium level of sophistication to maximize their revenue, making it harder for any single entity to dominate block production. This approach could significantly increase decentralization while maintaining a high level of security.

Conclusion: Safeguarding Ethereum’s Future

While Ethereum’s security is not currently at risk, Buterin emphasized that proactive measures must be taken to avoid future centralization problems. His proposals for capping staking, introducing a two-tier system, and enforcing transaction inclusion lists aim to preserve the decentralization that has been the backbone of Ethereum’s success.

With centralization posing long-term threats such as transaction censorship and market manipulation, these proposals are seen as crucial steps in safeguarding Ethereum’s future as a decentralized network.