Decoding Consensys Research Paper Is Ethereum Becoming Increasingly Centralized?

Deciphering the ConsenSys Research Report Is Ethereum's Centralization on the Rise?

Compiled by: Deep Tide TechFlow

The decentralization of Ethereum is dynamic and requires continuous effort to maintain.

In the cryptocurrency world, Ethereum has become a focus.

Decentralization is not only the core promise of Ethereum, but also its main source of attraction. However, with the upgrade and development of Ethereum, the community is starting to question its true level of decentralization.

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These concerns are not unfounded, as we often see scattered posts that discuss “Ethereum becoming centralized” from different perspectives.

Decentralization is not only about the distribution of power and control, but also involves network censorship resistance, security, and transparency. Therefore, understanding the level of decentralization of Ethereum is crucial for investors, developers, and ordinary users.

To answer these questions, Simon Brown, a researcher at ConsenSys, the parent company of Firefox Wallet, decided to conduct an in-depth study. He approached it in a more rational, rigorous, and systematic way, using multiple indicators and models to conduct academic analysis, aiming to reveal the true decentralization status of Ethereum.

Considering that the original paper is long and requires some academic background, the Deep Tide Research Institute has interpreted and organized the paper to help everyone better understand the key arguments.

Original Paper: Measuring the Concentration of Control in Contemporary Ethereum

Methodology: How to Measure the Level of Decentralization on Ethereum?

Decentralization is a complex concept involving multiple dimensions and perspectives. In order to accurately measure the level of decentralization of Ethereum, the author of this paper, Simon Brown, used various statistical methods and indicators for comprehensive measurement.

First, he introduced the Gini index, a statistical measure of inequality, commonly used in wealth distribution statistics.

Here, it is used to measure the distribution of resources or power in the network. The value of the Gini index ranges from 0 to 1, where 0 represents complete equality and 1 represents complete inequality. For example, a Gini index value of 0.9 means a high concentration of resources or power in the network.

In addition to the Gini index, the researchers also considered the following: HHI (Herfindahl-Hirschman Index): usually used to measure the competitiveness of specific industry sectors;

Shannon index: sensitive to the size of the distribution and the diversity of different values in the measured data, highlighting the differences between distributions that the Gini index did not capture.

Atkinson index: based on the social welfare approach, it infers how much redistribution of resources is needed to achieve a certain degree of equality.

Jensen-Shannon Divergence: This method is used to measure the similarity or difference between two probability distributions because we are interested in the decentralized level that changes over time (in simple terms, whether the degree of decentralization of Ethereum is similar or significantly different at different points in time).

Nakamoto Coefficient: This is a measure of the resources or power controlled by the top n entities in a system. For example, if the top 5 entities control over 50% of the resources, then the Nakamoto coefficient is 5. This gives us an intuitive sense of the influence of major entities in the network.

The selection of these indicators and models is not arbitrary. They are carefully chosen to capture various aspects of decentralization from different perspectives. This multi-angle approach ensures the comprehensiveness and accuracy of the results, helping researchers better understand the true nature of Ethereum’s decentralization.

II. Research Objectives: Which Indicators to Use to Measure Ethereum’s Decentralization?

In order to study Ethereum’s decentralization in depth, it is necessary to select appropriate data and objects that can represent various important aspects of the Ethereum network and provide meaningful metrics for decentralization.

As Ethereum transitions to Proof of Stake (POS) and with the emergence of new technologies such as MEV and account abstraction, this paper takes into account various links and processes involved in a transaction on Ethereum and summarizes the following indicators to measure Ethereum’s decentralization:

• Based on Original Nakamoto Coefficient:

• Consensus nodes by client

• Consensus nodes by country

• Execution nodes by client

• Execution nodes by country

• Distribution of native asset by amount

• Amount staked by pool/staking service provider

• Indicators related to PBS:

• PBS refers to blocks proposed by builders and relays, which play a key role in the Ethereum network.

• Blocks proposed by builders

• Blocks proposed by relays

• Indicators related to account abstraction:

• Number of user operations per bundler

• Number of wallets per deployer

• Other indicators:

• Effective inflation rate adjusted for burn

• Percentage of total supply staked

• Layer 2 rollups by relative TVL

At the same time, different indicators are assigned different weights.

III. Results and Explanation: How Decentralized is Ethereum?

Researchers observed Ethereum for a period of 90 days, from May 23, 2023, to August 23, 2023. The overall research goal was to explore how the dynamic trait of decentralization changes over time within Ethereum, rather than being a static characteristic that remains balanced.

A. Results Discussion

From the data below, it can be seen that different indices yield different results when applied to the same data. Taking the Gini coefficient as an example:

• Execution nodes categorized by country: Gini coefficient is 0.85

• Execution nodes categorized by client: Gini coefficient is 0.74

• Consensus nodes categorized by country: Gini coefficient is 0.79

• Consensus nodes categorized by client: Gini coefficient is 0.57

• Native asset distribution: Gini coefficient is 0.91

• Amount staked by pool/staking service providers: Gini coefficient is 0.76

• Blocks proposed by builders: Gini coefficient is 0.78

• Blocks proposed by relays: Gini coefficient is 0.54

• User operations per packager: Gini coefficient is 0.13

• Wallet count per deployer: Gini coefficient is 0.03

• Second layer rollups by relative TVL: Gini coefficient is 0.87

The color coding of these values is for ease of reading, with the closer the color is to red, the higher the degree of concentration, and the closer the color is to green, the higher the degree of decentralization.

It is evident that Ethereum is highly centralized in terms of stablecoins and staking pools. This seems to correspond to the dominant positions of USDC and USDT in the real world, as well as LDO’s leading position in the liquidity staking track.

B. Results based on the Nakamoto Coefficient Subsystem

Network nodes: When researchers examine the data based on the measurement dimensions selected by the Nakamoto coefficient subsystem, they first apply the Gini coefficient to indicators related to network nodes (note: the Nakamoto coefficient measures the degree to which the largest n entities control resources or power within a system).

From these analyses, we can observe that “Execution nodes categorized by country” and “Consensus nodes categorized by country” both maintain relatively high Gini coefficient values, 0.85 and 0.79 respectively. This indicates a high level of concentration of these consensus and execution nodes in certain countries.

C. Indicators related to PBS

PBS refers to the blocks proposed by builders and relayers. The data shows that there has been a significant change in the number of blocks proposed by individual builders and relayers, as well as the overall concentration in the market, between the first and last 24-hour intervals of the dataset. This indicates that the decentralization of the Ethereum network has increased during this period of time.

D. Other Indicators

When examining Rollups by TVL, we observe a significant level of centralization, with a 90-day average Gini index value of 0.87. These values make sense when observing the underlying data, where a single rollup (Arbitrum One) holds 54.3% of the TVL in all rollups (down from 64.5% at the beginning of the sample). The next highest is Optimism, with a TVL of 25.9%. This means that despite the existence of multiple rollups, two of them occupy the majority of the market share.

E. Indicators related to Account Abstraction

This section of the data mainly focuses on the impact of the ERC-4337 bundler. The data shows:

• The 90-day Gini index range for User Operations by Bundler is from 0 to 1, with a median of 0.6 and a standard deviation of 0.36.

• A particular bundler holds a market share of 76% among the 13 active bundlers.

These data indicate that the account abstraction space is still in its early stage, with no significant maturity or adoption of infrastructure. The impact of the ERC-4337 bundler on the decentralization of the network is relatively limited, so even moderate centralization is acceptable.

F. Main Index reveals increased overall centralization

The Main Index provides us with an advanced indicator of how the overall decentralization of the network has changed over time (2023/05/23 – 08/17).

The Gini index decreased from 21% to 14% across all measured dimensions, while the HHI index slightly increased from 7.5% to 10%.

• Implications:

• The decrease in the Gini index indicates an increase in decentralization or a decrease in concentration.

• An increase in the HHI index suggests an increase in concentration.

• Conclusion: Combining these two indices, we can say that overall, the decentralization of the Ethereum network has increased during this period of time.

IV. Overall Conclusion and Future Outlook

After in-depth research and data analysis, the researchers have reached the following conclusions regarding the decentralization of Ethereum:

• The decentralization of Ethereum is dynamic: Rather than being a static characteristic that remains in balance, decentralization is a dynamic characteristic that changes over time. This means that as the Ethereum ecosystem evolves and changes, its level of decentralization also shifts accordingly.

• Different measurement dimensions show different levels of centralization: For example, the categorization of execution nodes and consensus nodes by country and client shows different levels of centralization. This emphasizes the need for multiple methods to measure the importance of decentralization.

• Some parts show a high degree of centralization: For instance, in terms of TVL in Rollups, Arbitrum One and Optimism occupy the majority market share, indicating pronounced centralization.

• Ongoing efforts are needed to maintain decentralization: Research findings clearly indicate that the Ethereum ecosystem as a whole displays centralized elements, which might be far less than what the community expects. This means that continuous efforts are necessary to maintain a healthy level of decentralization.

Future Outlook

As the Ethereum ecosystem continues to develop, its components and overall infrastructure will also undergo changes. This implies that in order to ensure Ethereum’s decentralization, the community needs to continuously monitor and assess its level of decentralization and take necessary measures to ensure its health and stability.

In addition, with the emergence of new technologies and solutions, there may be new measurement dimensions and methods that contribute to the assessment of decentralization. Researchers must constantly update and refine their models to ensure accuracy and relevance.

Overall, decentralization is not only a technical challenge but also a shared responsibility of the community and the ecosystem. Only through ongoing efforts and collaboration can the decentralization of Ethereum and its long-term success be ensured.

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