Ethereum under attack: could the Merge have made it vulnerable and weak?

Some negative news stories following Ethereum’s transition to the PoS consensus can and should make anyone wary — is PoS really going to make Ethereum better and safer? In this article, we discuss new and unexpected threats to Ethereum.

Should Ethereum be regulated by laws?

Immediately after the merger was completed, US SEC Chairman Gary Gensler warned the Ethereum community that the ETH stacking available after the merger could fall under the Securities Act. The SEC has previously warned Ethereum that the PoS model of operation contains all the hallmarks of a security-asset and therefore should be regulated as required by law.

Under the current Securities Act, cryptocurrency companies that provide crypto-asset stacking services are required to pass the Howey Test.

To remind you, the Howey Test is used by the courts to determine whether a transaction is an investment contract and falls under SEC jurisdiction (with subsequent mandatory registration).

The final decision remains with the courts, but the SEC itself is of the opinion that crypto assets allowing holders to earn passive income have all the attributes of non-documentary (digital) securities.

When will a decision be made?

Gary Gensler has already given senators a report on about 10,000 cryptocurrencies with securities attributes. The SEC is ready to begin enforcing violators’ registration and is awaiting lawmakers’ assessment.

Because of the importance of this issue, Coinbase has launched an online service that shows how different members of the U.S. Congress rate their attitudes toward cryptocurrency from “very positive” to “very negative.” The algorithm is based on data from third-party service CryptoActionNetwork, which evaluates publicly available data like media statements, legislative initiatives, and willingness to accept donations in digital assets.

Experts so far are opposing in their assessment of possible regulation: some believe that regulation will bring legislative order and open the door to an inflow of new money. In contrast, others quite reasonably believe that the vast majority of crypto projects simply will not meet all the conditions that apply to the circulation of securities.

Most experts are inclined to believe that Gary Gensler’s personal reference to Ethereum is quite an alarming signal. Now we have to wait for the resolution of this situation.

The threat of centralization

Another negative factor that first appeared after The Merge is the threat of Ethereum centralization.

According to Santiment, more than 45% of the Ethereum nodes launched after The Merge update are managed by just two addresses. This has caused the crypto community a lot of controversy and concerns about the centralization of the project.

📊 According to our #Ethereum Post Merge Inflation dashboard, 46.15% of the #proofofstake nodes for storing data, processing transactions, and adding new #blockchain blocks can be attributed to just two addresses. This heavy dominance by these addresses is something to watch. pic.twitter.com/KQdFNgGloD

— Santiment (@santimentfeed) September 15, 2022

In August, similar concerns were shared by Web3 storage infrastructure co-founder Maggie Love, who reported that most of the nodes on the Ethereum network are managed by centralized vendors, including Amazon Web Services (AWS), which dominates the field with a 52.1% share, Hetzner (over 15%) and OVH (4.1%).

This online debate has sparked a wide range of different opinions and possible versions to explain facts: 

• Some haters have conducted their own investigation based on the source data and claim that the addresses belong to the Ethereum Foundation and the JPMorgan conglomerate.
• Proponents of the opposing viewpoint argue that Santiment’s analysts are superficial in their analysis. The two addresses cited in the argument actually consist of tens of thousands of validators, suggesting that these are many independent repeaters. In other words, the problem is greatly overstated.

Summary

It is still difficult to say which side is right in this dispute, but we can definitely state that the situation is strange and suspicious. The centralization of any blockchain project is absurd, as it destroys all the advantages of crypto and turns it into an analog of an ordinary online bank.

Considering the potential legal problems mentioned by the SEC chairman, it’s logical to ask whether switching to PoS is the right thing to do. Do the arguments of green mining and sustainability outweigh the new stack of problems that PoS creates? We’ll get the answer to that question from the market in the coming months. For now, the benefits of switching from PoW to PoS are still quite debatable.