How Proof-of-Stake Compromises Censorship Resistance

Proof-of-Stake centralizes block production by design, concentrating power in the hands of large staking pools like Lido Finance and centralized exchanges. This creates a small, identifiable set of entities that can be coerced.

Censorship is a protocol-level failure, not just a social one. Under OFAC sanctions, validators on networks like Ethereum can technically exclude transactions, as demonstrated by Flashbots' MEV-Boost relays post-Merge.

The Nakamoto Coefficient quantifies the risk. A low coefficient, like Solana's historical ~31, means few entities control consensus. This creates a target for regulatory pressure that Proof-of-Work's global, anonymous mining base resists.

Proof-of-Stake introduces identity. Validators must stake capital under legal names or corporate entities, unlike anonymous Bitcoin miners. This creates a direct legal attack vector for regulators like the OFAC to target.

Censorship is now a service-level agreement. Entities like Coinbase and Lido operate massive validator pools. Compliance with sanctions lists becomes a business decision, not a protocol violation, as seen with Tornado Cash transactions.

Decentralization metrics are misleading. Nakamoto Coefficient analysis for Ethereum shows client and geographic diversity, but the staking supply is controlled by a handful of identifiable entities. The network's social layer is its weakest link.

Evidence: Post-Merge, over 60% of Ethereum blocks were OFAC-compliant. This censorship pressure is a direct consequence of the identity-revealing staking model, a flaw absent in Proof-of-Work's anonymous hashpower.

Stake is a liability. Validators face direct financial risk from OFAC sanctions, unlike anonymous Bitcoin miners. This economic pressure forces compliance, as seen when Coinbase and Kraken censored Tornado Cash transactions on Ethereum.

Censorship is a coordination game. A single compliant validator is irrelevant, but a supermajority creates a censorship-by-default chain. The Lido/Coinbase cartel, controlling ~45% of stake, demonstrates this systemic risk.

The slippery slope is real. Compliance with one sanction list establishes precedent. Regulators will escalate demands, leveraging the validator cartel's economic incentives to enforce broader transaction blacklists.

Evidence: Post-Merge, over 50% of Ethereum blocks were OFAC-compliant. This wasn't a bug; it was the predictable outcome of staking's capital-at-risk model versus mining's operational-cost model.

Slashing is reactive. It punishes provable misbehavior after the fact. Censorship is a liveness failure, not a safety failure. A validator can silently drop transactions without creating a slashable cryptographic proof. The network sees only silence, not an attack.

The economic disincentive is insufficient. A validator controlling 33% of stake can censor without penalty. The cost is the opportunity cost of block rewards, not their slashed stake. For a state-level actor, this cost is negligible compared to the strategic value of censorship.

Sovereign validators are the real threat. The risk is not random validators but entities like Coinbase or Kraken complying with OFAC sanctions. Their slashing risk is zero; they follow legal orders. This creates centralized points of failure that slashing cannot touch.

Evidence: Post-Merge Ethereum shows the model. Over 60% of stake is in the hands of a few Lido and exchange-operated pools. Slashing protects against double-signing, but a coordinated liveness attack from these entities is an unaddressed systemic risk.