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How decentralized is Ethereum really? A comparison to Bitcoin

 


Ethereum is moving to a new consensus mechanism. According to official documents from the developers, this should lead to more decentralization. How much truth is there in this statement? And how decentralized was ETH before that?


Ethereum is a centralized blockchain anyway. Bitcoin is the only decentralized chain!


Who does not know these debates in crypto space?


In fact, history has also taught us that Ethereum has struggled with decentralization. The DAO hack in 2016 already showed us that one person has all the decision-making authority over the protocol - Vitalik Buterin. But what about nodes, miners and the switch to Proof of Stake?


Ethereum: decentralization at any price?

The ETH network is still operating on the Proof of Work consensus mechanism. However, this should be history with the merge at the end of September at the latest, preparations for this are in full swing. As stated in the official Ethereum documents, this also means a higher degree of decentralization.


But what exactly does decentralization mean?


In contrast to centralized systems, several nodes around the world are supposed to operate and secure the network in decentralized systems. If one node (computer) fails, there are enough others to guarantee security and availability. The blockchain network has a high fault tolerance due to precisely this component.


Bitcoin and Ethereum do not yet differ in this respect: Both chains are secured by nodes that ensure the constant availability of the network. The nodes are the points that feed transactions from a pool to the miners in the system. The miners then process the transactions into blocks and send them back to the nodes for validation.


Being able to run a multitude of nodes on a blockchain system is paramount. This is the only way the network can be reached at all times and is resistant to censorship. If only a small number of people control a correspondingly large number of nodes, they could push through unwanted changes.


This is exactly where the “old” Ethereum differs from Bitcoin


Ethereum on the Proof of Work consensus mechanism cannot be credited with the same decentralization as Bitcoin. Anyone can operate a bitcoin node: buy hardware, set up the setup and off you go. The only cost factor is the electricity used. On the other hand, Ethereum nodes require more resources, so the entry hurdle is higher.


While a Bitcoin (Full) Node requires around 5 GB of storage space, ETH requires a whopping 10 terabytes. More than 20 times that of a standard laptop.


If Ethereum maximalists compare the absolute numbers, they probably have to admit: Yes, Bitcoin is really (more) decentralized. Although ETH still had around 12,500 nodes around a year ago, it is now at 5,000 due to the merger. Bitcoin, on the other hand, is rising from one all-time high to the next and is currently at almost 14,630 accessible (active) nodes. The total number is around 46,000.


But not only the absolute number of nodes is decisive, but also the type of nodes. One of Ethereum's biggest problems is that 70 percent of the nodes are operated on hosted servers such as the Amazon Web Service. This can be clearly seen in the following picture.


The e-commerce giant is said to account for 30 percent of hosted nodes, posing a huge threat to a potential network outage. Jeff Bezos probably just has to push a button.


Big difference to Bitcoin: Nodes are also hosted on the most popular cryptocurrency, but only around 30 percent.


Who Makes the Rules?

With Ethereum, the matter is very clear: a small group of programmers around Vitalik Buterin has the power to make changes to the protocol. Bitcoin's core developers, on the other hand, cannot impose upgrades or changes on the community - the nodes decide for themselves whether to accept the new rules of the game.


How centralized ETH really is, users could observe at the DAO Hack 2016. With no way of recovering the stolen ETH, Buterin decided to hard fork the blockchain at the time. Ethereum's blockchain was suddenly not as immutable as expected.


What emerged from the old chain was Ethereum Classic, which is still freely available on the market today. That is why Classic is also considered to be the original form of ETH.


Will it be different with the merge?

The Proof of Stake consensus mechanism to be implemented is based on a completely different system than the Proof of Work. In contrast to Bitcoin, the network will no longer be kept running by miners and nodes in the future, but by stakers. These make their Ethereum available for interest in order to validate new blocks on the chain, so-called validators.


Users can become validators from a limit of 32 ETH and thus participate as a node and in the profit. According to the Ethereum Foundation, it is more decentralized than in the Proof of Work because the hurdle is not that big. Critics, however, point out that large protocols are already gaining enormous power over the cryptocurrency . Lido (known from the Terra Luna crash) currently owns around 33 percent of all staked ETH, the four largest platforms together even around 54 percent.


The problem is that pools with high capital accumulation can secure large parts of the staking and thus pose a huge threat to the security and therefore decentralization of the chain. It remains to be seen whether this will change when new players enter the market and cannot yet be judged.


In any case, we will be looking forward to the numbers until the merge.


Disclaimer

All information contained on our website has been researched to the best of our knowledge and belief. The journalistic contributions are for general information purposes only. Any action taken by the reader based on the information found on our website is entirely at their own risk.

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