Vitalik Buterin Warns of Staking Centralization Risks in Ethereum’s Upcoming 'Scourge' Upgrade

Ethereum co-founder Vitalik Buterin has highlighted centralization in Ethereum’s proof-of-stake system as “one of the biggest risks” to the blockchain’s security and decentralization. In a recent blog post, Buterin outlined potential approaches to mitigate these risks, which are set to be addressed in Ethereum’s upcoming “Scourge” upgrade. From block construction challenges to staking capital concentration, here’s what Buterin proposes to keep Ethereum secure and decentralized.

The Proof-of-Stake Centralization Problem

Buterin’s latest post focuses on the economic pressures that could lead to centralization in Ethereum’s proof-of-stake system. While Ethereum's earlier "Merge" and "Surge" upgrades aimed to improve scalability and transaction throughput, Buterin believes the network is now facing a critical challenge—centralization in block production and staking capital.

With around 30% of Ethereum’s total supply currently staked, Buterin warns that as this figure approaches 100%, it could create systemic risks that undermine Ethereum’s decentralized ethos.

Block Construction: Fighting MEV Centralization

One of the major concerns Buterin discusses is the growing influence of two actors controlling 88% of Ethereum’s blocks through maximal extractable value (MEV) practices. MEV refers to the ability of block proposers to extract value by prioritizing, excluding, or reordering transactions, which could lead to censorship or delayed transactions—especially problematic in time-sensitive cases like token swaps or liquidations.

To combat this, Buterin suggests introducing an encrypted mempool that would make it more difficult for block proposers to censor specific transactions. However, finding a balance between staker authority and security remains a challenge. Buterin acknowledges that more work is needed to create a simple, yet effective design for this solution.

Solutions to Block Construction Centralization

Buterin presents two potential strategies to mitigate MEV’s negative impact:

1. Inclusion Lists: Stakers propose a list of transactions that builders must include in the next block, reducing the ability to prioritize or exclude transactions for personal gain.

2. Multiple Concurrent Proposers: The block production process is split between multiple actors, reducing the risk of centralized decision-making in block construction.

Buterin concludes that a cautious “wait-and-see” approach may be the best strategy. Limiting staker authority at first, with the potential to increase it over time as the Ethereum community gains a better understanding of the live MEV market, could provide a more conservative path forward.

Staking Capital Provision: Risks of Concentration

Another key area of concern is staking capital concentration. Buterin notes that while the current 30% staked ETH is sufficient to protect against 51% attacks, if staking grows closer to 100%, new problems will arise. These risks include weakening the effectiveness of slashing mechanisms, unnecessary issuance of up to 1 million ether per year, and the potential dominance of a single liquid staking token (LST), which could outshine Ethereum’s network effects.

Approaches to Mitigate Staking Risks

To counter staking centralization, Buterin outlines two primary strategies:

1. Capping Staking Amounts: Limiting the amount of ether that any one user can stake, which would prevent over-concentration of staking power.

2. Two-Tier Staking: Dividing staked ETH into a slashable and unslashable stake, reducing the concentration of risk without discouraging staking participation.

Buterin urges the Ethereum community to either agree on one of these proposals or accept the risks associated with a large portion of ETH being locked in LSTs.

Application-Level Solutions

Beyond protocol-level changes, Buterin suggests additional strategies at the application level. These include developing specialized staking hardware to promote solo staking, providing rewards such as airdrops to solo stakers, and designing applications that reduce MEV through more sophisticated mechanisms. In his words, “Ethereum is not just an L1, it is an ecosystem.”

Conclusion: The Path Forward for Ethereum

Vitalik Buterin’s latest post underscores the need for careful consideration of centralization risks as Ethereum continues to evolve. With the Scourge upgrade on the horizon, Ethereum’s community must decide how to handle the growing economic and technical pressures that threaten the decentralization of the network. By addressing MEV, staking capital concentration, and promoting solo staking, Ethereum can continue to grow while staying true to its decentralized foundation.