Is Ethereum Censorship a Concern Post-Merge?

Following Ethereum network’s transition to Proof-of-Stake (PoS) earlier this month, a new addition to the ecosystem is already sparking censorship concerns in some circles.

Australian blockchain development agency Labrys told Blockworks that roughly 25% of new blocks added to the Ethereum chain post-Merge currently adhere to the Office of Foreign Asset Control’s (OFAC) requirements.

Labrys said it has been internally tracking protocol-level censorship since the Merge and was troubled by what it had discovered.

“It is concerning to see how quickly the potential for censorship has grown unchecked since the Merge and it’s projected to get much worse,” Labrys’ CEO Lachlan Feeney said. “It is critical for the long-term success of the entire blockchain industry, not just Ethereum, that layer-1 blockchains remain credibly neutral.”

Block building under proof-of-stake Ethereum

Under PoS, Ethereum users who hold more than 32 ETH can stake their ETH in a validator and earn a staking yield. 

While staking can prove profitable, one way to increase returns is via a software add-on to take advantage of the Maximum Extractable Value (MEV) — formerly Miner Extractable Value under Ethereum’s old consensus model.

New software developed by crypto research organization Flashbots, dubbed Mev-boost, is predominant, allowing validators to increase the staking annual percentage rate by 1.5% — depending on network demand.

But there is a trade-off. When enabled, validators cease allocating which transactions go into their blocks and instead outsource block building to what is known as MEV-boost Relays, Labrys explained.

Relays are off-chain services that accept privately-created blocks by individual block builders. In turn, those builders determine which block — out of the ones their relay has received — is more profitable and submit that block to the software to be compared against the most profitable blocks other relays could build. The winning block is then proposed by the validator. 

The problem, according to Labrys, is that MEV-boost relay providers operate as regular business entities, with a large portion of them deriving from the US and thus subject to US jurisdiction.

This means censoring transactions the government doesn’t approve of, including those deriving from mixing service Tornado Cash, or disallowing transactions from sanctioned addresses under the mandate from OFAC.

Last month, Tornado Cash — thought by US lawmakers to have been used to launder stolen funds linked to major hacks — was added to OFAC’s Specially Designated Nationals list, along with 45 associated Ethereum wallet addresses.

The issue is not that the relays refuse to relay blocks to Flashbots’ software, Labrys said. It’s that they’re relaying blocks that are stripped of any Tornado Cash transactions, essentially censoring these transactions and preventing them from getting confirmed on the blockchain.

No cause for alarm

Ultimately it’s up to the validators to decide whether to restrict their block proposals to those with only OFAC-compliant transactions — or any other discriminatory criteria — and validators typically work with multiple relayers, not only Flashbots.

Bloxroute, for example, offers both a “Regulated” and a “Max Profit” stream. The regulated blocks will omit transactions from sanctioned addresses, but the Max Profit option simply selects the most valuable block construction.

“Validators should be making these decisions, and I’m giving them options,” Bloxroute CEO Uri Klarman told Blockworks in an interview.

“There is currently a lack of regulatory clarity in terms of which participants of the Ethereum blockchain need to comply with OFAC’s decisions and in what way,” director of research firm Edison Group Milosz Papst told Blockworks in an email. He said that lack of clarity was spilling over to block builders.

But Bloxroute’s legal team has concluded that playing the role of a neutral middleman and providing optionality to the validators is sufficient to fulfill regulatory requirements.

In contrast, CommodityStream Inc., a replay provider under the Manifold brand, has taken the position that packaging of transactions in a certain way is not a legal necessity at all.

“CommodityStream views government or civil requests to block content at the [Remote Procedure Call] level as ineffective, inefficient, and overboard,” according to Manifold’s documentation. The company “would pursue its legal remedies before complying with such a request.”

Ethereum’s core developers are generally not concerned — at least not yet. In a pre-Merge developer call on Aug. 18, the issue was discussed at length and the consensus was that the current MEV designs could be improved, to enhance, so-called proposer / builder separation (PBS), but were unlikely to result in censorship.

French developer Mamy André-Ratsimbazafy said uncensoring relays should give the most rewards to validators, providing a natural incentive not to censor. That’s the logic behind Bloxroute’s Max Profit service.

Flashbots itself has open-sourced its software, which will make it easier for alternative relay providers to crop up.

“If we have any open relay, then I think that censoring will fall flat on its face,” André-Ratsimbazafy said on the call.

At worst, the use of relayers censoring transactions from OFAC-regulated addresses would merely delay those transactions from being processed, according to Ethereum co-founder Vitalik Buterin. 

Speaking on the Aug. 18 call he noted that even if 80% of validators were running censoring software, the other transactions would still be included into the blockchain, after 5 blocks (known as “slots” in proof-of-stake Ethereum), or about a minute, on average.

“The network will not censor [transactions] as long as some proposers don’t run censorship software — the network as a whole is not censoring,” reiterated Ansgar Dietrichs, an Ethereum Foundation researcher.

It will be up to the global Ethereum community, and all its stakeholders, to ensure that this remains true in the future, as the regulatory landscape evolves.

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