Ethereum faces censorship following The Merge
The US Office of Foreign Assets Control (OFAC) banned Tornado Cash, a decentralized cryptocurrency mixer, last month. This was the first occasion that the US government authorized a smart contract.
Numerous Ethereum stakeholders have taken measures to comply with the fines as a result of the significant ripple implications of this decision. Circle, dYdX, GitHub, Infura, Oasis, and Alchemy all blocked access to their goods and services for sanctioned IP addresses and linked addresses.
Ethereum advocates and engineers are also concerned that these actions signal a more difficult future in which the network may become susceptible to censorship.
When Ethereum converts to proof-of-stake — and validators become the ones processing transactions on the network — it is likely that people who operate these validators would filter specific transactions to comply with existing and future punishments. In doing so, the validators may damage Ethereum’s reputation as a neutral technology. Even one of Ethereum’s most ardent advocates would forsake the whole project if this problem were to occur.
EthHub co-founder and one of Ethereum’s greatest proponents Anthony Sassano said on Twitter, “If the Ethereum base-layer ends up engaged in permanent censorship, I will consider the Ethereum experiment a failure and I will move on.”
Changing to evidence of stake
After The Merge, Ethereum’s consensus method will be proof-of-stake. The miners will be replaced by validators, who will process new transactions with the knowledge that, if they behave maliciously, their staked tokens will be reduced.
Coinbase, Kraken, Binance, Staked.us, Bitcoin Suisse, stakefish, and Figment are some of the major validators that provide staking services to their consumers so they may receive staking incentives. These businesses have proven so successful that they now manage close to 40 percent of the ether deposited by validator nodes on the Beacon Chain.
Lido Finance, a liquid staking system responsible for more than 30 percent of ether deposits on the Beacon Chain, remains a potential centralization point. However, it does not function as a single validator but rather uses a variety of validators, such as those described above.
If these validators chose to comply with US sanctions, they would have the authority to implement protocol-level censorship, forcing the Ethereum community to back validators with whom they may disagree. Due to the nature of Beacon Chain, customers are unable to un-stake their ether until the Shanghai update, which will occur 6 to 12 months after The Merge.