Solana & Google’s Partnership Questions The Decentralization of PoS

Google’s cloud computing service Google Cloud announced that it had partnered with Solana to become a validator. That wasn’t the only news though as it also announced that its Blockchain Node Engine, which before now only available to Ethereum, will also be available to Solana beginning next year. Solana was up more than 15% following this announcement.

How Decentralized Is Solana & Proof-of-Stake Blockchains?

Although many consider Google’s latest partnership with Solana a big win for the web3 space, it further raises criticism about how centralized Solana and other proof-of-stake blockchains might actually be which defeats the purpose of web3 technology in the first place- decentralization! Earlier last week, another cloud provider Hetzner which is currently a validator on the Solana blockchain, banned all Solana activity on its servers and took over 1,000 Solana validators offline as a result. In this case, the why isn’t necessarily important as to how a centralized service provider can disrupt operations of a supposedly-decentralized blockchain network.

According to Google Cloud engineer Sam Padilla, Hetzner, as recently as August, housed 40% of the Solana network’s validators and 20% of the network’s total stake. It gets more interesting though as Padilla also revealed that Hetzner, along with two other centralized service providers Equinix and Amazon Web Services hosted a majority 65% of Solana’s stake in August. That means these companies literally hold the fate of this “censorship-resistant blockchain” and a decision by all three to halt all Solana activity on their servers would instantly take the network offline. That further highlights the dependence of networks like Solana on centralized service providers. 

Solana argues that the Solana Foundation’s Server Program initiative, which pairs validators with approved independent service providers, helps to further decentralize the Solana network. However, it seems counterproductive as such efforts only lead to the majority of Solana validators being dependent on centralized companies like Hetzner, Equinix and AWS.

Solana isn’t the only blockchain that has faced the wrath of Hetzner. In August this year, the cloud service provider stated in a Reddit post that users were not allowed to use its products for anything related to crypto mining or staking and categorically mentioned that this ban also applied to Ethereum. Mind you, Hetzner was powering roughly 16% of the cloud-hosted Ethereum nodes at the time, second only to Amazon Web Services. That brings us to another blockchain that has faced heavy criticism of centralization since the Merge. Ethereum’s transition from proof-of-work to proof-of-stake consensus mechanism seems to have made the network less decentralized and brought it under the SEC’s radar. 

Ethereum, Decentralized?

The Merge replaced miners with validators, which saw validators having to pledge their ETH tokens to verify transactions on the Ethereum network. Like Solana, Ethereum is also a proof-of-stake network and so they share a similar problem of their heavy reliance on centralized service providers as validators on their respective networks. One needs to stake a minimum of 32 ETH to become a validator on the Ethereum network and the big crypto exchanges and other centralized institutions have used this opportunity to stake millions of ETH to have a larger percentage of the validator nodes. However, this comes at the expense of Ethereum’s decentralization. According to Arcane Research, leading centralized exchanges such as Coinbase, Kraken, and Binance, alongside liquid staking protocol Lido, own over 60% of the staked ETH.

Centralized exchanges holding the largest shares of ETH staked is also worrisome from the regulatory angle as these exchanges are heavily regulated, and they can easily reject some transactions as a precaution to avoid falling under the prying eyes of the Feds. However, to save their skin, these exchanges are going against one of the core principles of the web3 landscape, which is censorship resistance. 

Speaking of regulatory scrutiny, the United States Securities and Exchange Commission (SEC), had claimed that Ether was not a security before now. However, the SEC’s chair Gary Gensler, while testifying before the Senate Banking Committee already hinted that Ethereum could be subjected to the securities laws after the Merge. He mentioned the Howey test which is used to determine whether an asset passes as a security and likened the ‘staking’ model to one in which the public is anticipating profits from the efforts of others. Gensler may have a point considering that many have opted to take their ETH with custodians such as Coinbase in the hopes of gaining returns from this activity. 

Moving on, Ethereum and Solana are only part of a long list of proof-of-stake networks that are heavily dependent on centralized service providers. Following Hetzner’s ban on Solana activity last week, validators of other blockchain networks like Cardano and Cosmos had to search for new service providers as it is expected that Hetzner would clamp down on these networks as it has done to Ethereum and Solana. For Cardano, it is worth mentioning that Hetzner is the number 2 Internet Service Provider (ISP) Cardano nodes, meaning any ban could seriously impact network functionality.  

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