Ethereum staking has a looming centralization problem – but the network’s co-founder Vitalik Buterin proposed a new way to address the issue on Tuesday.

In a blog post, Buterin suggested modifying the penalty system for Ethereum validators by increasing the cost of colluded misbehavior.

Penalizing Centralized Ethereum Staking

Specifically, the method would impose large penalties on validators who misbehave – even accidentally – if a large share of separately staked ETH misbehaves simultaneously.

“The theory is that if you are a single large actor, any mistakes that you make would be more likely to be replicated across all “identities” that you control, even if you split your coins up among many nominally separate accounts,” he wrote.

In September 2022, Ethereum switched to a proof-of-stake consensus mechanism, which lets users earn a yield on their ETH by locking their coins within the protocol. It also places control of block validation and transaction processing in the hands of those who hold the most ETH.

That includes centralized exchanges and staking providers like Lido, Coinbase, and Binance, which offer services pooling smaller investors’ ETH together to stake on their behalf. Even asset managers like Fidelity are looking to use some of users’ assets for staking purposes.

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This has raised community concerns around potential collusion among large Ethereum validators to launch a hostile takeover of the network – especially if compelled by the government. JPMorgan, for example, noted in October that the Merge and Shanghai upgrades have made Ethereum more centralized.

Buterin’s War On Large Ethereum Validators

While large Ethereum validators already face greater “slashing” penalties – explicit cuts to a validator’s stake – compared to smaller stakers, Vitalik said penalties around such an uncommon event aren’t enough to move the needle on centralization.

“This post proposes to extend a similar sort of anti-correlation incentive to more ‘mundane’ failures, such as missing an attestation, that nearly all validators make at least occasionally,” he explained.

Theoretically, such a system could create economic disincentives around centralized staking and help reduce economies of scale in the industry.

Last week, Buterin also proposed a “rainbow staking” system, which would create new classes of Ethereum stakers based on their goals.

The system would reduce the economic and technical burden of independent staking that asks “everything of everyone,” which has driven ETH investors to stake with centralized services instead.

“We have become very dependent on ‘social pressure + virtue’,” he said regarding centralized staking providers earlier this month. “If it is inevitable, we should be clearer about whether we rely on incentives or social pressure + virtue, rather than excessively rely on the latter.”

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