Was The Ethereum Merge a Mirage?

The Ethereum Merge, an upgrade to the cryptocurrency that was a source of global excitement when it launched on September 15th, is beginning to face fresh criticism as troubling news surfaces about the network’s distribution of power.

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Every cryptocurrency is managed by a pool of governors, called miners, whose voting power is anchored to some real-world ballast. Where the voting power of Bitcoin miners is tied to the high electricity cost of the mining process, Ethereum miners would give over a sum of Ether, called a stake, which acts like a security deposit. A miner’s stake can be punitively “slashed,” either automatically or by the community, for a variety of misbehaviors. Additionally, whereas someone with a very powerful general-purpose computer might be able to run a competitive Bitcoin mining rig, only users who have already sunk large amounts of money into the currency can mine it. For these reasons, the miners under Ethereum’s new post-Merge model (called “Proof-of-Stake”) were supposed to be more beholden to the network’s community and to its values, including anonymity and decentralization of power.

About a month before the Merge, Tornado Cash, a service run on Ethereum, was blacklisted by the US government for its use by North Korean hackers. On a basic level, “blacklisting” a blockchain address is meaningless—the ability to transact without authorization by a third party is built into the protocol. But many cryptocurrency users trade in security for convenience and make their transactions using a centralized service built “on top” of a blockchain. These centralized services, being subject to federal regulation, rushed to comply with the blacklist and froze the accounts of associated users. At the time, the compliance was seen as theoretically traitorous, but practically meaningless; underneath the corrupted applications, the network itself hummed along.

On October 14th, however, data began to show that the corruption had penetrated deeper than previously expected. Under Proof-of-Stake, many Ethereum miners use a sort of recommendation algorithm called Maximal Extractable Value, or MEV, to help them decide which transactions are worth including in the blockchain and which should be rejected. In the past weeks, the field has come under the sudden and near-total domination of an organization called Flashbots, whose suggestions appeared to align perfectly with the federal blacklist. The data showed that the algorithm had become so popular that a majority of Ethereum miners were using the software, and thereby indirectly complying with the blacklist.

Blockchains are not democracies, so a “majority” does not mean that none of the censored transactions will go through. Transactions are published in blocks every 10 to 20 seconds, so a censored transaction being rejected from every other block might take 30 seconds to go through, instead of 15. But the 51 percent threshold possesses immense symbolic weight because of the undefined but probably large population of users who would, in the unlikely event of a fork (a sort of secession, where one group makes their coins incompatible with another, usually for ideological reasons), side with the majority for convenience’s sake.

Realistically, the odds of Flashbots—or, currently, any major Ethereum application—doing something like this are very slim, since (barring the technical difficulties involved in leveraging their position to initiate such a split) in the event of a fork it is likely that the overwhelming majority of users would remain loyal to the traditional Ethereum chain. But the possibility is nonetheless disturbing: It implies that the US government is able to reach into the network and move money around just like they do with banks.

Many Bitcoin advocates have pounced on the new data as evidence that Ethereum’s transition to Proof-of-Stake was misguided and counter-productive, pointing to the lack of a comparable situation of state leverage among Bitcoin mining syndicates. Since big financial instruments like Coinbase can double as staking platforms, they argue, the staking community inevitably ends up running through the same channels that the rest of the financial ecosystem does, effectively recentralizing the network.

Probably the question will go unanswered, since a US-orchestrated Ethereum civil war still seems like a distant possibility. And quibbling over ways to shore up the network technically against such attacks may be overlooking a simple (and, in fact, more profitable) fix. Both Bitcoin and Ethereum have been criticized for their high fees and slow transaction times, especially compared to payment services like Venmo or Apple Pay. Decentralized Finance (DeFi) platforms have been wracked by scandals and financial disaster, while NFTs, which were supposed to revolutionize copyright law, have become a playground for wealthy speculators and collectors. There is a noticeable lack of the zeal and imagination that characterized the post-2008 crypto community, as evidenced most damningly by the apathy with which stakers have continued to use regulation-compliant suggestion algorithms like Flashbots.

Should enough users wake up one morning without faith in the project, and pull their funds, the blacklist will have done its job, regardless of technical fixes.

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