One Misconception and Severe Design Flaw of the Ethereum Merge

Sergey Vasylchuk is the Co-founder & CEO of the staking provider Everstake.

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The Merge is nigh, and there are some misconceptions about it that even the wonderfully written FAQ on the dedicated page can't answer. Understanding the new reality is paramount, especially as you prepare for it to emerge. 

That said, I often find people ignoring or misconstruing very important notions that are inseparable from the Merge. Considering the immense importance of Ethereum (ETH) becoming a proof-of-stake (PoS) blockchain and the impact that it will have on the crypto economy (which I talked about elsewhere), I think many of us can't afford to ignore those things. 

So, I decided to talk about them point-blank.

There are no 400,000 validators

As we are approaching the Merge in Ethereum, I hear a quite repetitive narrative about it having about 400,000 validators after going full PoS as there are allegedly this many owners of at least ETH 32 (USD 49,500), which is the minimal stake size. But that is plainly wrong. Moreover, anyone would be able to run a node without any ETH.

As a CEO of a company that makes its bread by validating on more than 50 different blockchains, I can see thousands of people launching nodes, but I can't see all of them ensuring nearly 100% uptime. Soon many of them will get their fingers burned by slashing, lose their money, and eventually become completely demotivated or financially incapable of starting all over again.

It means that the PoS incarnation of Ethereum won't have nearly as many validators as some expect. Moreover, I don't expect the number of nodes to be significant enough to satisfy those with a serious decentralization kink. But, of course, there will be more node operators than the proof-of-work (PoW) could ever afford.

Those efforts are at risk of being eclipsed by a very ominous presence: major centralized exchanges as validators.

Exchanges as validators are a flaw

Even now, Binance, Coinbase, and Kraken hold over 32% of staked ETH. With Ethereum switching to PoS, the risk from exchanges will only increase.

The fact that exchanges can participate in validation is a personal pain in the butt. It is a severe design flaw that I don't even know how to rectify. Maybe some project will find a solution someday, but right now this seems impossible. 

Validators in PoS are trusted because acting against the network's interest will cost them a lot of money, and they are aware of that. It incentivizes them to work diligently and, for example, maintain 100% uptime. 

But exchanges don't use their own funds to stake. They just push their users' money there and make profits they don't even disclose sometimes. If they act against the interests of the network, they won't lose anything –unlike their customers, whose tokens may deprecate because of an exchange's ill-natured actions. 

The exchanges are big enough to harm an entire ecosystem and get away with it. And knowing the influence and the scale of Ethereum, it will become a huge problem when the Merge occurs.

Conclusion

The most important notion, though, is hardly surprising: we are all people, and we drag our human imperfections even in the perfect technologies. As long as some people vie for power for the sake of power and others chase the quick buck without any thought about the importance of technological advancement, there will always be politics, even in crypto. 

And I fear that the Merge will let more people like that into the realm where they can impact the ecosystem. It's not a reason to fear the Merge itself, of course. Its importance for technology and the very evolution of crypto is difficult to underestimate. 

What I mean, after all, is that we all must be ready to face this new reality when it finally arrives.
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Learn more:
- Vitalik Buterin Says His Influence Over Ethereum Decreases as Network Nears the Merge 
- Analysts Advise Ethereum Users to Avoid Transacting on Merge Day, Outline Numerous Risks

- No ‘Black and White’ Answer to the Proof-of-Work vs. Proof-of-Stake Question, Says Kraken
- The Merge’s Long Term Impact on Ethereum

- Major Bitcoin & Crypto Companies Warn of 'Extreme' Risk in Proof-of-Stake Systems
- The Compromises and Benefits of Ethereum Switching to a Proof-of-Stake Network