Valid Points: Ethereum 2.0 Trends Toward Decentralization

Tomorrow, the first backward-incompatible upgrade for the Ethereum 2.0 Beacon Chain will be activated on the Pyrmont test network. The upgrade, dubbed “Altair,” will introduce a number of code changes, including increased penalties on validator misbehavior and improved functionality for lightweight versions of Eth 2.0 software. 

(More information about what to expect from Altair can be found in a previous issue of Valid Points.)

This week, in a guest post in New Frontiers, Alex Svanevik, the CEO of blockchain analytics firm Nansen, and Nansen’s Research team break down the data behind validator behavior and stake centralization on Eth 2.0 thus far. While Altair is expected to further improve network dynamics, the  authors highlight metrics suggesting that security and decentralization are already trending in a positive direction.  

The following is an overview of network activity on the Ethereum 2.0 Beacon Chain over the past week.

Disclaimer: All profits made from CoinDesk’s Eth 2.0 staking venture will be donated to a charity of the company’s choosing once transfers are enabled on the network.

Nansen is a blockchain analytics platform tracking over 90 million labeled Ethereum wallets and accounts. The following guest post authored by Nansen CEO Alex Svanevik and his team is an excerpt from a recently published blog post breaking down the data behind Ethereum 2.0. 

While centralized exchanges such as Kraken and Binance continue to command a significant share of total Ethereum 2.0 stake, they appear to be losing share to decentralized staking alternatives such as Lido Finance and Rocket Pool. 

The top four staking entities (Lido, Kraken, Binance, Staked.us) on Eth 2.0 make up 36.6% of total ETH deposits. Lido is the second largest by total ETH deposited next to Kraken, managing over 750,000 ETH on Eth 2.0 from 9,000 unique Ethereum accounts. 

The Herfindahl–Hirschman Index (HHI) is a metric in traditional economics that measures market concentration and competition. It has been applied to blockchains to measure relative network decentralization. Nansen calculates HHI for Eth 2.0 by squaring the share of each source account that has staked on the network, and summing the resulting numbers.

Though it is clearly not the case that all deposit accounts are independent, the trend does indicate a gradual decrease of HHI over time. Still, it’s important to remind ourselves that centralization risks exist on every layer of the blockchain technology stack. According to data from Ethernodes, more than 21% of Ethereum nodes run on Amazon Web Services.

Deposit activity on Eth 2.0 is curiously irregular and does not correlate with ETH prices. 

The number of daily deposits to Eth 2.0 began falling from May 5 onward, just as Ethereum was inching toward its high of $4,000. The number of deposits then rose significantly from mid-May to mid-June as the value of Ethereum almost halved. 

Ethereum 2.0 represents a marked change in the security and economic model of Ethereum, with multiple ramifications including the transformation of ETH as an inherently yield-generating asset.

Teddy Oosterbaan

Valid Points incorporates information and data about CoinDesk’s own Eth 2.0 validator in weekly analysis. All profits made from this staking venture will be donated to a charity of our choosing once transfers are enabled on the network. For a full overview of the project, check out our announcement post. 

You can verify the activity of the CoinDesk Eth 2.0 validator in real time through our public validator key, which is: 

0xad7fef3b2350d220de3ae360c70d7f488926b6117e5f785a8995487c46d323ddad0f574fdcc50eeefec34ed9d2039ecb. 

Search for it on any Eth 2.0 block explorer site.

New episodes of “Mapping Out Eth 2.0.” with Christine Kim and Consensys’ Ben Edgington air every Thursday. Listen and subscribe through the CoinDesk podcast feed on Apple Podcasts, Spotify, Pocketcasts, Google Podcasts, Castbox, Stitcher, RadioPublica, IHeartRadio or RSS.