Will Censorship on Ethereum Lead to Alternative Blockchains?

There is no denying that Ethereum (ETH) stands alone as crypto’s most dominant and innovative project. Indeed, the advent of most things crypto — beyond simple payment transactions — are rooted in the Ethereum blockchain. But following the upgrade of Ethereum to Proof of Stake (PoS), an event known as “the Merge” we’re seeing clear evidence that Ethereum is now facing potentially crippling censorship issues.

Prior to the Merge, the main censorship concern for DeFi advocates was pervasive usage of centralized stablecoins like Tether (USDT) and USD Coin (USDC). The companies behind these stablecoins have long had close connections with U.S. regulators. There have even been instances where they’ve frozen accounts belonging to specific owners on official request.

What if regulators someday demanded all USDT and USDC be frozen? That’s why the stablecoin, Dai (DAI) was conceived and created — out of a desire for a decentralized stablecoin beyond the reach of hostile government officials.

However, the algorithms that are supposed to maintain DAI’s peg to the U.S. dollar may not be 100% reliable — especially in turbulent markets. So, to set users minds at ease, DAI is nearly 32% backed by deposits of USDC in violation of its own raison-d’ etre. Now, even the decentralized solution isn’t censorship resistant! Furthermore, there’s a new and even more serious problem: Censorship attempts are spreading beyond stablecoins, and on to leading blockchains like Ethereum.

After the Merge, more and more Ethereum blocks are being produced by censorious MEV-Boost relays, the most notable of which is Flashbots.

MEV, or “Maximum Extractable Value,” is a term used to describe arbitrage opportunities found by reordering transactions within a block while it is being produced. That’s possible because proof-of-stake validators are free to choose what transactions to include in their blocks, if any, and in what order. Flashbots and other MEV-Boost relays essentially provide off-chain block-building marketplaces for on-chain traders and validators. According to Flashbots data, MEV has extracted more than $675 million from blockchain users since January 2020.

Since Ethereum transitioned to a Proof-of-Stake consensus mechanism, Flashbots and other MEV-Boost relays have been responsible for building an increasing amount of Ethereum blocks. Per MEV watch data, 90% of blocks were produced on September 15 without using MEV-Boost relays; that number has dropped to 43% as of October 14. This is to be expected, as validators can achieve substantially higher yields by outsourcing their block-building duties to MEV-Boost relays.

According to MEV Watch, 51% of Ethereum’s blocks produced today were built by so-called “OFAC (Office of Foreign Assets Control) compliant” MEV-Boost relays, meaning relays that have openly stated their intention to censor transactions related to Tornado Cash or other privacy utilities targeted by the U.S. Treasury in the future. That means that 51% of all blocks were produced by relays comfortable with censoring Ethereum if need be. In effect, around half of Ethereum’s newly enfranchised PoS validators are currently censoring the Tornado Cash or similar privacy smart contracts.

The Ethereum organization’s response has been to not take any action against these censorious validators for fear of turning Ethereum into the “morality police”, as Ethereum founder Vitalik Buterin has stated.

Impact of Ethereum’s Censorship

What exactly happens if your transaction is rejected by an Ethereum validator?

Well, it will continue sitting in a pool of unexecuted transactions until it finds a validator willing to include it in its next block of transactions. And because of this, it will likely take more time to get through.

This may not be that big a deal at the moment — with roughly half Ethereum’s validators still willing to confirm these transactions. But what if the number of un-censoring validators falls from to 25%? Or 10%? At some point, the delays could make the network effectively unusable.

A New Solution, Cosmos (ATOM)

Unlike Ethereum, Cosmos is not a single blockchain with thousands or millions of applications built on top of it. It’s an ecosystem of presently 49 sovereign, interoperable blockchains and is commonly referred to as “the internet of blockchains.”

The Cosmos Hub is secured by 125 validators using PoS. ATOM tokens are earned for validating transactions on the Hub.

ATOM is the native coin that represents the first blockchain within the Cosmos ecosystem.

This means each application can have its own rules, consensus, native token (for transaction fees and governance) and security for that blockchain. Or new projects can choose to utilize Cosmos’ established rules, token and security for easier, quicker development. The infrastructure provides the scalability, interoperability and sovereignty needed for member blockchains to achieve mass adoption. This makes Cosmos a growing favorite among crypto developers.

If Tornado Cash was built in the Cosmos ecosystem, it would have its own blockchain. There would be no censorship over it — as long as there were validators willing to secure the network by staking Tornado.

The Cosmos model has enormous potential for DeFi. And several leading projects are building their applications on Cosmos. Perpetual futures specialist decentralized exchange dYdX recently migrated from Ethereum to Cosmos to develop its own blockchain. Circle — the world’s second largest stablecoin issuer — will launch USDC on Cosmos next year.

The antidote for growing censorship pressure is more decentralization. Cosmos is bringing more and more DeFi not onto a single platform, but onto an already decentralized ecosystem.

That makes it one of the hottest competitors not only to Ethereum, but also to other established blockchains like Solana (SOL), Cardano (ADA) and Polkadot (DOT).

Reference

Marko Grujic, Ethereum Censorship Raises Profound Privacy Questions, Oct 2022