Could Rainbow Staking Provide A Solution To Ethereum’s Centralization Problem?

For many people, keeping tabs on the crypto market has turned into a monotonous endeavor of tracking the live price of different cryptocurrency assets and trying to figure out which one will perform better in order to spot investment opportunities early on. But while everyone is busy making predictions about Bitcoin and Ethereum, many interesting developments are happening behind the scenes, or better said, behind the constant obsession with price monitoring.

These developments, which often go unnoticed, play a key role in the evolution of the crypto industry, and therefore anyone interested in digital currencies should pay close attention to them. So, in case you’ve missed the latest events in crypto, here’s a quick introduction to one of the most recent initiatives in the Ethereum ecosystem, namely Rainbow Staking.

Ethereum’s Centralization Trend

Ever since its inception, Ethereum has placed great emphasis on continuous innovation and improvement, as evidenced by its dynamic roadmap. This forward-thinking approach, centered around regular updates and upgrades aiming to tackle ongoing challenges and provide new solutions for long-standing issues has ensured the network’s progress so far and continues to push Ethereum forward. However, despite all the growth it has experienced over the years, Ethereum still has a lot of problems it needs to address, with centralization being the most concerning of all at the moment.

As you may know, much of crypto’s appeal lies in its decentralized nature. Digital currencies are not subjected to government capital controls nor do they require intermediaries to facilitate transactions. This provides numerous advantages such as the absence of a single point of failure, easy access for users, inclusivity, and the spread of power and control among community members.

Theoretically, giving power back to people should ensure a more even distribution of assets. Unfortunately, in Ethereum’s case, the practice doesn’t reflect the theory as the network has been drifting further away from this vision of decentralization.  

Ethereum’s increased centralization is a side-effect of the Merge, the biggest upgrade in the platform’s history which saw the transition from a Proof of Work (PoW) consensus mechanism to a Proof of Stake (PoS) model. While the change was both successful and necessary due to high energy consumption, it created a new problem for the network.

Staking requires users to lock up a certain amount of ETH in an account to serve as collateral and allow them to participate in the validation process. The validation method has proven efficient in terms of maintaining the blockchain’s security and ensuring its smooth running, but it has also raised concerns regarding centralization.

Users who are willing to put more of their funds toward staking have higher chances of being selected as validators and therefore earn more rewards. This obviously favors individuals or entities with larger ETH holdings, so the rich are getting richer while smaller holders are discouraged from participating in staking. The outcome is the accumulation of wealth and power in the hands of a few. The fact that a select number of platforms such as Lido, Coinbase, and Binance control over 80% of Ethereum’s liquid staking validation makes the centralization issue all the more concerning.

An increasingly centralized network poses a series of risks for Ethereum. For one thing, this stands in direct contradiction with Ethereum’s ethos and the principles of blockchain technology which holds decentralization and distribution as core concepts. Then there’s the unfair allocation of staking rewards and the marginalization of smaller participants by reducing the influence they have over the network.

Moreover, centralization also increases security risks as the network becomes more susceptible to attacks. If one major validation operator gets targeted and crashes, the effects on the network could be devastating.

Lastly, regulators can also see this as an opportunity to intervene and assert their influence on the Ethereum ecosystem, paving the path to increased regulatory scrutiny and the enforcement of measures that can further corrode Ethereum’s decentralization.

Vitalik Buterin’s Solution To Centralization Concerns

There’s been a lot of talk about centralization in the crypto sphere in the years following the Merge but little has been done in this respect. However, the topic has been recently brought to the forefront once again by Ethereum’s co-founder, Vitalik Buterin, and this time it seems like there might be a potential solution to the problem in the form of Rainbow Staking.

Present at ETHTaipei’s conference hackathon in Taiwan, Buterin took the occasion to introduce and talk in-depth about this concept initiated by Barnabé Monnot of the Ethereum Foundation. Basically, Rainbow Staking aims to change Ethereum’s staking structure by splitting it into two separate categories of staking: heavy staking and light staking. While the first type of staking services implies more intense participation in the staking process and higher penalties for non-compliance, the second type employs a lottery-like approach where staking is not slashable and participants enjoy greater flexibility.

Buterin hopes that diversifying staking services to cater to the needs of different users will encourage solo staking on the platform which has so far been hampered by technical difficulties, including setting up a staking node and resource constraints. With Rainbow Staking, Ethereum can create a staking ecosystem populated by a more diverse range of validators and service providers, which will ultimately ensure a more even distribution of assets and hopefully address the centralization issue.

As expected, many have commented on the proposal’s complexity, the implementation challenges it may entail, and the impact it could have on users’ activity. At this stage, it’s much too early to provide clear answers to all these dilemmas.

There’s obviously still a long way to go until Rainbow Staking transitions from idea to reality as the process requires exhaustive research and development. However, the emergence of this new concept highlights Ethereum’s relentless pursuit of innovation and its ability to overcome even the thorniest of challenges.