Anti-censorship and acceptance of censorship, Ethereum may fall into a long-term regulatory dilemma

Source: Weisman Notes

Author: Liu Ye Jing Hong

This article does not have strict conclusions; it is more about discussion and exchange. Moreover, the topics discussed in this article seem to be relatively rare in the Chinese-speaking community, and I have not conducted rigorous and careful research, relying only on information sources collected from public channels.

The recent major event in Ethereum is undoubtedly the preparation for the Merge, but beneath the surface of the Merge, there are actually turbulent waters. Since I often discuss English-speaking KOLs, I have summarized some significant events that are hidden beneath the Merge.

Interested readers can delve deeper into the issue of the beacon chain's resistance to censorship.

The U.S. is Promoting Protocol-Level Censorship

First, let's go back two days ago when the well-known KOL @lex_node revealed on Twitter that "U.S. validators (including the very powerful Coinbase) will promote protocol-level censorship."

The origin of this statement comes from the fact that more than 66% of the validators on Ethereum's beacon chain will comply with OFAC regulations.

OFAC, or the Office of Foreign Assets Control of the U.S. Department of the Treasury, has the mission of managing and enforcing all economic and trade sanctions based on U.S. national security and foreign policy.

In other words, if OFAC deems it necessary to sanction a particular Ethereum account, it can be fully implemented, just like the current sanctions against Tornado.

More directly, OFAC can theoretically control whether an Ethereum account can conduct transfer transactions and other actions. Once your Ethereum account is sanctioned by OFAC, the Ethereum validator nodes will not execute the corresponding block packaging based on relevant policies. This effectively disables the corresponding account at the blockchain level.

Why is Blockchain No Longer Resistant to Censorship?

People have a preconceived impression of blockchain as having a good resistance to censorship, but why, after a series of judicial cases and sanction events, does it seem that blockchain does not exhibit a strong resistance to censorship?

The core points are two:

• First, as the blockchain industry grows, it is inevitable to cater to corresponding regulations. The increasing market share of USDC shows that both institutional and individual investors tend to use compliant stablecoins and Web3 protocols.
• Second, U.S. regulators are not only keeping up with technological advancements but also have a deeper understanding of blockchain than most industry professionals.

Specifically, blockchains like Ethereum are decentralized and very difficult to regulate or censor. However, after Ethereum pushes for the Merge, regulators can conduct block/transaction reviews through the validators of the beacon chain.

Currently, whether it is the validators on the beacon chain now or the validators after the Merge, they all rely on institutional validation/project validation. For example, Coinbase, Lido, KRAKEN, BITCOIN SUISSE, etc.

However, these nodes will be subject to OFAC regulations and must respond to regulatory policies. In other words, since the validator nodes belong to U.S. institutions, they need to comply with the U.S. government's relevant reviews of the Ethereum blockchain. Moreover, this is at the protocol level, delving into the review of each transaction.

So how to respond?

Fortunately, Vitalik Buterin and the Ethereum Foundation do not wish to see Ethereum subjected to protocol-level censorship by the U.S. government and have been actively opposing such censorship in recent times.

In the latest Ethereum community survey on Twitter, Vitalik voted for X, believing that "viewing censorship as an attack on Ethereum and destroying those nodes through community consensus."

Of course, Coinbase's beacon chain staking service builder @LukeYoungblood elaborated on Coinbase's node operation mechanism in a non-public manner on Twitter.

However, looking back at OFAC's jurisdiction, it seems that regardless of whether the validators are within or outside the U.S., as long as the company entity, namely Coinbase, is within the scope, it must comply with regulations.

On the technical side, Vitalik and the Ethereum Foundation have also been actively researching the Block Proposer Separation methodology, or BPS, which is the block proposer separation scheme.

Those interested in technical solutions can refer to the following materials:

https://writings.flashbots.net/writings/why-run-mevboost/

https://ethresear.ch/t/proposer-block-builder-separation-friendly-fee-market-designs/9725

Some well-known KOLs have also publicly questioned various staking institutions, but no responses have been received so far.

Conclusion

The ongoing resistance to censorship storm in Ethereum, I believe, has far-reaching implications beyond the Merge. The Merge, strictly speaking, is merely an update of Ethereum's economic model. However, the resistance to censorship storm in Ethereum shakes the very foundation of the entire blockchain industry. Once the resistance to censorship storm in Ethereum is brought to the forefront, it will inevitably lead to a split in blockchain consensus.

One faction, led by U.S. institutions, advocates for U.S. control and censorship of blockchain. The other faction, primarily consisting of idealistic developers, is dedicated to resisting censorship in blockchain. Meanwhile, various blockchain-based applications will need to take sides in this divide.

Perhaps, a massive struggle between resistance to censorship and acceptance of censorship has already begun.