Centralization risk in ETH 2.0: 1% of Ethereum addresses own 95% of the supply

If just 1% of network addresses hold 95% of all Ether (ETH) in circulation, after excluding known custodial addresses – exchanges, smart contracts, and other platforms, what does this mean in terms of decentralization with the arrival of proof of stake? There is a real risk of centralization in Ethereum 2.0.

Possible centralization in Ethereum 2.0 post The Merge:

Warning signs of a high risk of centralization in Ethereum 2.0 (the largest Web3 blockchain, smart contracts and decentralized applications) continue to appear in the market as the new update dubbed “The Merge” approaches.

The founder of Ethereum himself, Vitalik Buterin, has already expressed his concern in this regard, taking into account the percentage of ETH participation in the Lido pool, which could cause centralization in ETH 2.0, when Beacon Chain joins the network. major.

95% of the offer in the hands of 1% of addresses

On-chain analyst CryptoVizArt.btc shared the information earlier this week that just 1% of Ethereum addresses hold 95% of the entire ETH supply in circulation.

In response to a question from me about these funds, the analyst clarified that the data already excludes addresses of known third-party exchanges, smart contracts, and escrow services, meaning that all of this amount is native staking tokens. ) to contribute to consensus on making the network proof-of-stake.

This creates a threat situation against decentralization in the network. Influencing both security aspects, by creating 51% attack vectors, as well as creating dominance over Ethereum’s inflationary model in the cumulative distribution of staking rewards by the largest addresses, generating a negative effect of economies of scale that has incentives to gradually bring more and more centralization to ETH 2.0.

Decentralization is a fragile state that requires constant vigilance across the network, but with such a large asymmetry relative to Ether (ETH) holders, the threat is already immediately real as soon as the upgrade occurs, as at any time 1% of the largest holders can deposit a portion of their balance, taking control of the consensus.

When it comes to proof of stake, there are some incentives that favor the network, as the more ETH an investor has, the more motivated they are to stay honest and keep the network running as smoothly as possible, reducing the threat to little. Of attack.

But when taking into account the reward payment proportional to the amount wagered, there is another economic incentive as a counterweight, where the “domain” of validation becomes interesting to increase the rewards, forming a snowball that can worsen over time.