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Ethereum 2.0 Could Increase Adoption, But Has Centralization Risks

During the Second Annual Global DeFi Summit, Rivet and CXO founder Greg Lang moderated a session on Ethereum 2.0 where speakers discussed the expected updates, as well as the benefits and risks they represent.

Bankless founder David Hoffman began by defining some of the key updates expected with Ethereum 2.0. He says the update “will increase access to the Ethereum protocol on two fronts.”

PoW and PoS

First, it will provide a more easily accessible consensus mechanism. While proof-of-work is very competitive and resource intensive, proof-of-stake will return the consensus to “small consumer-grade laptops.”

This is beneficial to involve more people regarding security and decentralization. You then mentioned fragmentation which according to Hoffman scales the amount of block space without trust, allowing more people to use it for cheaper rates.

Alex Wearn, CEO of IDEX, follows up on this, emphasizing the importance of proof-of-stake. With proof-of-work, miners are incentivized to create valid blocks through the investments they have made in their hardware and the Bitcoin reward.

Now, with pproof-of-stake, instead of contributing capital and energy, users will deposit assets in staking, which will act as a form of deposit. Wearn Compare this to a deposit made when renting an apartment, which is lost if the tenant acts irresponsibly.

Benefits and risks

With the changes expected from the Ethereum 2.0 update, there are certainly many benefits, but the speakers at the session also highlighted some potential risks.

First, Wearn highlighted the fact that more people will be able to use Ethereum due to lower transaction costs.

He notes that most of Ethereum’s success comes from decentralized finance (DeFi) and non-fungible tokens (NFT).

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However, both tend to generate higher value transactions. Users with smaller amounts of money are generally excluded due to high transaction fees.

Describing the upgrade as a “dial-up broadband moment,” He hopes that more people who can use Ethereum will lead to new types of apps.

However, one of the main risks of switching to a proof-of-stake mechanism ands the possibility that governance will be consolidated in the hands of the few who accumulate the most ETH.

EthereumEthereum

Ethereum

Alex Gluchowski, CEO of Matter Labs said that as it stands, Ethereum distribution is one of the most decentralized among Layer r1 protocols. However, He noted that such accumulation of wealth would become a security problem.

Meanwhile, Wearn also noted that exchanges will also become validators. This means that staking them could become a centralization risk.

For example, if they were influenced by external forces, many less technical users would have a hard time transferring their funds elsewhere.

Hoffman also pointed out that liquidity pools could offer “tradable notes” to users, which represent their staked tokens.

If many DeFi protocols do this, users will likely end up concentrating on whichever one is the most liquid. Hoffman said this It could also potentially cause a centralization of liquidity.

The post Ethereum 2.0 could increase adoption, but presents risks of centralization was first seen on BeInCrypto.

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