The number of Ethereum validators exceeds one million, and the centralization of staking has drawn attention

Recently, the number of active validators on the Ethereum network has surpassed 1 million, a milestone that has sparked market discussions. Validators, as a core component of Ethereum's Proof of Stake (PoS) mechanism, have seen a significant increase in their numbers, which is particularly noteworthy. However, this rapid growth has also brought potential technical challenges and centralization issues, raising concerns among industry insiders.

Data shows that on March 28, the number of Ethereum validators reached an important milestone of 1 million. Community discussions mainly focus on the growth of the number of validators, especially after the Shapella upgrade, where staked funds can be flexibly withdrawn, which is seen as a key step for Ethereum towards a more scalable and energy-efficient network. However, with the increase in the number of validators, each validator needs to independently download the latest data and verify state changes within a limited time, which means that more powerful computing capabilities are required to handle larger data blocks.

Statistics show that there are currently over 850,000 validators staking through centralized platforms. This is mainly because most ETH holders either do not have enough ETH (at least 32) to stake independently or lack the technical ability to handle complex staking operations. This situation has raised concerns about increasing centralized risks. If the continuous growth of network bandwidth allows validators with large computing resources to participate efficiently, it could lead to institutional data centers suppressing individual self-hosted nodes, thus pushing the Ethereum network towards centralization, which contradicts its fundamental principle of decentralization.

It is worth noting that the number of validators is not equivalent to the number of participating entities. Running a validator requires 32 ETH, but one entity can run multiple validators on a single server. Ethereum's transition to the PoS mechanism is crucial for improving efficiency, but maintaining a balance between the growth of the number of validators and the decentralization and availability of the network remains a significant challenge.

To address the issue of validator centralization, an innovative proposal has been put forward aimed at enhancing the decentralization and fairness of the Ethereum staking mechanism. The proposal suggests implementing harsher penalties for large validators' failures and encourages validators to decentralize their operations through a "counteractive incentive" mechanism.

The core idea of this mechanism is that if multiple validators controlled by the same entity fail simultaneously, they will incur higher penalties than if a single validator fails. This is because any error from a large validator could be replicated across all identities it controls. For instance, validators in the same cluster (such as a stake pool) are more likely to experience related failures, which could be due to shared infrastructure.

The proposal suggests imposing corresponding penalties on validators that deviate from the average failure rate. If a large number of validators fail within a given period, the fines for each failure will be higher. Simulation results show that this method may reduce the advantages of large Ethereum staking platforms, as larger entities are more likely to experience a spike in the failure rate due to related failures.

In addition, other proposals have been put forward, such as different penalty mechanisms, to minimize the advantages of large validators and assess the impact on geographic and client decentralization. Although Ethereum already has penalty mechanisms (such as slashing) to deal with serious violations, the new proposal aims to incorporate penalties into the daily operation of the network, emphasizing the promotion of genuine diversity among validators.

At the Ethereum Taipei Conference in 2024, the concept of "Rainbow staking" was proposed as another method to address centralization issues. This approach encourages service providers to diversify, with particular attention to staking platforms that hold a large amount of Ether assets, such as Lido Finance (which accounts for 7% of the total ETH circulation).

Currently, the number of individual validators (solo stakers) in the Ethereum network is insufficient, mainly due to technical challenges (such as running one's own node) and financial constraints (holding less than 32 ETH). As a result, many users who wish to stake ETH can only participate through liquid staking solutions.

Rainbow staking is divided into heavy staking and light staking. Heavy staking can be penalized and signs in each time slot; light staking cannot be penalized and signs through a lottery system. This approach seeks to clearly separate the two methods and may require both to sign on the same block to achieve finality, thereby attempting to combine the security of both methods.

The core purpose of Rainbow staking is to allow small ETH stakers to participate in network validation in a lightweight manner. By increasing the number of participants, it partially offsets the centralization effects brought about by large institutions and protocols holding a significant amount of staked ETH.

This framework also aims to address the emergence of a dominant liquidity token that could potentially replace ETH as the primary currency on the Ethereum network, and provide competitive participation by enhancing the economic value of individual stakers.

However, before the rainbow stake becomes a viable design for Ethereum, more R&D work is needed. The biggest challenge may not be on the technical level, but on the conceptual level.