Is Ethereum 2.0 walking into the open jaws of crypto exchanges?

The merge changes the balance of power in the network.

The merge is shifting the balance of power in the network. The big crypto exchanges stand to gain—and they also become a risk.

The Merge is approaching, the largest upgrade in the still-young history of Ethereum. Moving from Proof of Work to Proof of Stake will have a massive impact on the world's second-largest blockchain network—and the entire crypto economy.

But to date there are a few misconceptions circulating that even the beautiful FAQ section of the blockchain won’t answer. Even people connected to the merger ignore important facts. Or they misunderstand. We can’t afford that. So I decided to speak openly about these issues.

Ethereum Merge: There aren’t 400,000 validators

I keep hearing that there are 400,000 validators on the new network. To become one, you need at least 32 Ethereum (about $50,000). The number of validators is simply wrong.

As the CEO of a company that makes its bread validating more than fifty different blockchains, I can imagine thousands of network nodes starting up. But I can’t imagine all of them guaranteeing nearly 100% uptime, which is needed for the network. Soon many of them will burn their fingers, lose their money, and eventually become fully demotivated. Or financially unable to restart.

That means the "proof of stake" incarnation of Ethereum will not have nearly as many validators as some predict. I also don’t expect the number of nodes to be large enough to satisfy those who care deeply about decentralization. Their efforts risk being overshadowed by a very threatening presence: the big centralized crypto exchanges as validators.

Crypto exchanges as validators are a flaw

Crypto exchanges Binance, Coinbase, and Kraken already own more than 32 percent of Ethereum set aside for staking. With Ethereum shifting to Proof of Stake in the wake of the Merge, the risk they pose will only grow.

The fact that exchanges can participate in validation personally bothers me. It’s a serious design flaw, and I’m not sure how to fix it. Maybe a project will find a solution someday, but right now it seems impossible.

Proof of Stake validators act in a reliable way because trading against the network’s interests will cost them a lot of money, and they’re aware of that. That gives them an incentive to work carefully and, for example, maintain 100 percent uptime.

But exchanges don’t use their own funds for staking. They push their users’ money into it and pocket profits they sometimes don’t even disclose. If they trade against the network’s interests, they don’t lose—unlike their customers, whose tokens could drop in value due to unfriendly exchange behavior.

These exchanges are big enough to damage an entire ecosystem and walk away. Given Ethereum’s influence and size, this could become a big problem when the merge happens.

The Merge will attract power-hungry people

The key takeaway from these facts is hardly surprising: we’re all human, and we bring our human flaws into even the most perfect technologies. As long as some people crave power for power’s sake and others want to make quick money without thinking about technological progress, there will always be politics, even in the crypto economy.

And I fear the merge will bring more of these power-hungry folks into the space who can influence the ecosystem. Of course, that’s not a reason to fear the merge itself. Its importance for technology and the development of cryptocurrencies is hard to overstate. But we all need to be ready to face this new reality when it arrives.