Ethereum (ETH)’s move to proof-of-stake had raised fears of greater network censorship. And these fears seem partially justified since new data shows that half of the blocks produced are subject to requests from the American regulator OFAC, which is part of the United States Treasury. What does that mean?
Reminder: Ethereum, proof of stake, and validators
Ethereum now works with proof of stake. That is to say that it is validators – and no longer miners – who check the conformity of transactions and who integrate them into successive blocks. The latter has an economic incentive to provide this work, and of course, seek to maximize their profits.
This is where “MEV-boost” comes in. To put it simply, MEV-boosts allow customers to outsource building blocks. This means that they sell the space of their blocks to external entities who build them in order to optimize the space – and therefore the yield for the validators.
The problem with these MEV-boots is that they can choose to be regulated by the Office of Foreign Assets Control (OFAC) regulator. The latter is part of the United States Treasury, and in particular, manages the sanctions applied by the nation to various entities. We recently heard about him in the Tornado Cash case: OFAC had sanctioned the cryptocurrency mixer, already triggering controversy.
If these MEV-boosts choose to be regulated by OFAC, this can of course poses a censorship problem. The State could indeed prevent transactions from being validated, or prioritize certain ones. This goes against the philosophy developed by Ethereum, and cryptocurrencies in general.
50% of Ethereum transactions submitted to the US Treasury?
And this is precisely what seems to be happening for the majority of Ethereum blocks. According to data published by MEV Watch, yesterday more than 50% of the blocks were built by MEV-boosts that comply with OFAC requirements:
Of the blocks built by MEV-boosts, 89% are subject to the requirements of the US Treasury Department. Moreover, the number of blocks produced in this way tends to increase since the Merge, if we observe the following graph:
Let’s take an example of the limitations of MEV-boosts that choose to submit to the Treasury. They will not be able to include transactions coming from the Tornado Cash protocol, which is on the OFAC sanctions list. The transactions in question can of course be processed by other validators, but if they do not necessarily have great visibility on the network.
Ethereum is more censorable than in the past?
What to remember from all that? Firstly that Ethereum is now more censorable than in the past if validators choose to use MEV-boosts. But also that any protocol, even decentralized, is subject to the geographical location and the choices of its main actors.
The problem is of course not unique to Ethereum, even if the use of MEV-boost accentuates the imbalance. We remember that the Bitcoin (BTC) mining firm Marathon Holdings sparked a scandal on this subject in March 2021. It had indeed chosen to mine blocks by complying with American regulations, including those of OFAC.
This is a point of vigilance that was debated even before the Merge, and it would seem that the fears were justified. What will happen if this share of transactions continues to grow? In the coming months we will tell, but it is a significant problem, which will have to be monitored.