Arthur Hayes Questions PoS Ethereum’s Decentralization, Suggests Rising Price

Arthur Hayes asks a fundamental question. The latest post on his blog. The former BitMEX CEO compares the PoS Ethereum to Binance Smart Chain, that’s FamouslyThey are admittedly centralized. Arthur Hayes also describes how the validator’s disagreements with the majority are going to go, and predicts disaster for the dApps that build over a platform that doesn’t prioritize censorship resistance. In the short term, though, he’s bullish on Ethereum.

Artur Hayes describes an alarming reality many crypto Twitter users have discussed and noticed before he gets into the details. It all has to do about validators.

“As of 21 September, Lido Finance, Coinbase, and Kraken together control slightly over 50% of all ETH staked on the beacon chain. They are therefore the strongest validators, and could in effect censor which transactions are processed. What does each of these three centralized entities share in common? They are all US-owned companies or DAOs with major investments from US venture capitalists.”

For those keeping score, that’s a centralizing factor and a few single points of failure. The US has jurisdiction over all of these companies, making it one of most restrictive places in the globe. And of course, Arthur Hayes recognizes  “protections in place to help ensure decentralization” and that the system punishes validators that censor transactions. The PoS system appears fragile. Validators include large institutions which can be sued by the government. It is the most powerful validators that will manage the entire system. 

Arthur Hayes Sees Centralization 

Is the new slashing system for punishing unruly validators going to work? Arthur Hayes says this is the best way to deal with rebels. 

  • “There is a way to slowly lose your ETH if < 33% of the network refuses to attest to blocks. A validator will be punished if he or she slow loses ETH by reducing the node’s deposit. The validation node that is required to remove a validator from the network will be taken down if the deposit drops below 16 ETH. This capital becomes dead capital as for the foreseeable future you cannot unstake ETH.”
  • “There is a fast way to lose your ETH if > 33% of the network refuses to attest to blocks. The penalties get exponentially worse quickly such that opposing validators quickly fall below the 16 ETH threshold and are booted from the network.”

Hayes says that if that happens, Hayes expects everyone to let it happen again. He compares this story with the DAO original. Ethereum’s developers decided to fork and “everyone at the time tacitly went along with the devs who forked the protocol so that folks could get their money back, rather than staying true to Ethereum’s supposed “code is law” ethos.”

ETHUSD price chart for 09/27/2022 - TradingView

 Source: ETH/USD on| Source: ETH/USD on

Ethereum short-term bullish

Don’t get Arthur Hayes wrong, despite the criticism of the platform and PoS systems, he still thinks Ethereum will do well in relation to the dollar. 

“ETH as a financial asset — fully tethered to the US-led financial system and under the pretense of “decentralization” — could still do extremely well in the near future. The issue that I wrestle with is whether truly decentralized financial and social dApps can exist at scale (i.e., with hundreds of millions of users)”

It all comes down to scarcity. According to Hayes, the only thing that matters in the next three to six months is “how ETH issuance per block falls under the new Proof-of-Stake model. In the few days post-merge, the rate of ETH emissions has dropped on average from a +13,000 ETH per day to -100 ETH.” If this continues, Arthur Hayes is optimistic: 

“The price of ETH continues to get smoked due to deteriorating USD liquidity, but give the changes in the supply and demand dynamics time to percolate. Check back in a few months, and I suspect you’ll see that the dramatic reduction in supply has created a strong and rising floor on the price.”

Are the words of former BitMEX CEO correct? We’ll find out soon enough.

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