The community fears transaction blocking by large validators

25.08.2022

591

5 min

The precedent of sanctioning the cryptocurrency mixer Tornado Cash and the arrest of its developer continues to resonate in the cryptocurrency community. After a series of access blockings by leading DeFi projects and the freezing of USDC tokens on wallets that received transfers from the mixer, the issue of censorship in the field of decentralized applications, which were considered uncontrollable by decisions of the authorities, has become particularly urgent. An existential question has arisen in the community: how resistant to censorship and blockchain is the Ethereum blockchain fundamentally?

The fear is related to Ethereum's transition to the new Proof-of-Stake (PoS) consensus algorithm, after which the responsibility for creating new blocks and checking transactions will fall on validators, not miners as it used to be before. Any participant who contributes 32 ETH to the contract can become a validator, so potentially one person or organization can manage multiple validators at once. The debate is around the emergence of large centralized organizations that, with their influence on the network, will go along with regulators and be able to selectively reject transactions or apply other sanctions if necessary.

“This probability is very high, which is what is being discussed now in light of the upcoming upgrade of the Ethereum network,” ENCRY Foundation co-founder Roman Nekrasov comments, emphasizing that in terms of resistance to censorship, Proof-of-Work (PoW)-based networks are more reliable and less vulnerable to external control. “Since the validators in PoS networks are quite certain organizations or individuals, it means it's easier to impose sanctions against them or require them to refuse to conduct transactions to certain addresses,” Nekrasov explains. On the one hand, this will help to combat money laundering and criminal financial transactions, but on the other hand, it will ruin the whole idea of cryptocurrencies, which is based on the tenet of full control of the owners over their assets, the expert believes.

In the Ethereum network, which runs on the PoS algorithm, a block is created every 12 seconds, and one validator is randomly chosen to select the transactions that will be included in that block. A group of other validators is then randomly selected to validate that block. We can expect that in most cases the validation results of this group will be 100%. However, if a validator intends to censor some address, he or she may refuse to include transactions from a sanctioned address or smart contract in the block by being randomly selected to validate it. It would require joint action by multiple validators to invalidate a block at this level, but if the US government appears to be more important to them than the Ethereum community, in theory, this could happen.

Among the largest centralized validators are staking pools such as Lido or Stakewise, as well as leading cryptocurrency exchanges such as Binance, Kraken, and Coinbase. Brian Armstrong, head of the latter, said he would rather opt out of staking at Coinbase than censor the protocol, specifying that he would prefer a third neutral option.

The slashing system built into Ethereum's upcoming consensus mechanism also comes up in the discussion. Back in 2018, Ethereum founder Vitalik Buterin wrote that if more than 50% of validators decided to randomly block transactions, the rest of the validators and customers even as a minority would have the right to burn the shares of those who censor the network. Vitalik also wrote that he voted for such a scenario in one of the most popular discussions about censorship on Twitter.

Another topic of discussion was the concept of maximal extractable value (MEV) and the likelihood of transactions blocking through software called MEV-Boost. MEV describes the profit a validator can make by selecting or rearranging transactions within blocks, and MEV-Boost is additional software developed for the PoS version of Ethereum.

MEV-Boost allows validators to outsource block mining to maximize rewards. The Ethereum community is concerned about the likely censorship of MEV-Boost relays that act as mediators between validators and block creators. A member of the Flashbots team responsible for the development of MEV-Boost, nicknamed Hasu, confirmed that relays run by Flashbots would block sanctioned addresses.

This idea turned out to be so relevant that it was brought up at a recent meeting of Ethereum Core developers. “If we allow censorship of user transactions on the network, then we basically failed,” developer Marius van der Wijden said during the meeting, “If we start allowing users to be censored on Ethereum then this whole thing doesn’t make sense, and I will be leaving the ecosystem.” Most developers, however, expressed hope that the potential problems associated with MEV would not be a prevailing threat, affirming that they remain focused on creating Ethereum as a protocol free of censorship.

“Again, in terms of crypto philosophy, transaction censorship treats any cryptocurrency owner as a criminal who has yet to prove his financial cleanliness. You might as well ban knives because you can kill with a knife,” Nekrasov argues. According to the expert, many cryptocurrency owners, for whom the resistance to censorship is not “empty words,” will want to transfer their coins into bitcoins resistant to any kind of censorship after Ethereum will switch to PoS.

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