Arthur Hayes Questions PoS Ethereum’s Decentralization, Suggests Rising Price

The controversial Arthur Hayes is asking a burning question in his latest blog post. The former BitMEX CEO compares the PoS Ethereum to Binance Smart Chain, that’s famously and admittedly centralized. Arthur Hayes also describes how the validator’s disagreements with the majority are going to go, and predicts disaster for the dApps that build over a platform that doesn’t prioritize censorship resistance. In the short term, though, he’s bullish on Ethereum.

Before Artur Hayes gets into all of that, he describes a concerning reality that many people in crypto Twitter have noticed and discussed. It has to do with the validators:

“As of 21 September, Lido Finance, Coinbase, and Kraken together control slightly over 50% of all ETH staked on the beacon chain. This means they are the most powerful validators and, in essence, they could censor what sorts of transactions are processed. What do all three of these centralized entities have in common? They are all US-owned companies or DAOs with major investments from US venture capitalists.”

For those keeping score, that’s a centralizing factor and a few single points of failure. All of those companies are under US jurisdiction, one of the most restrictive in the world. And of course, Arthur Hayes recognizes  “protections in place to help ensure decentralization” and that the system punishes validators that censor transactions. Nevertheless, the PoS system seems fragile. Big institutions that the government can sue are the validators. And the biggest validators will control the whole system. 

Arthur Hayes Sees Centralization 

How will the slashing mechanism that punishes unruly validators play out? According to Arthur Hayes, this is how the system will deal with rebels: 

• “There is a way to slowly lose your ETH if < 33% of the network refuses to attest to blocks. Slowly losing your ETH means that a validator is punished by reducing the deposit on a node. Should the deposit drop below 16 ETH, that validation node is removed from the network. This capital becomes dead capital as for the foreseeable future you cannot unstake ETH.”
• “There is a fast way to lose your ETH if > 33% of the network refuses to attest to blocks. The penalties get exponentially worse quickly such that opposing validators quickly fall below the 16 ETH threshold and are booted from the network.”

If that happens, Hayes predicts that everyone will let that happen again and again, and…