The Cost of Compliance: Can Proof-of-Stake Networks Censor Transactions?

Sanctioned transactions are blocked at the validator level, forcing a choice between legal compliance and network neutrality. This creates a centralized point of failure.

• >50% of Ethereum blocks are OFAC-compliant post-Merge.
• Entities like Lido and Coinbase control massive staking shares.
• The threat is not theoretical; Tornado Cash sanctions proved it.

The dominant PBS (Proposer-Builder Separation) relay, MEV-Boost, is run by a handful of entities like Flashbots and BloXroute. They filter transactions, creating a censorship cartel.

• ~90% of Ethereum blocks use MEV-Boost.
• Major relays exclude OFAC-sanctioned transactions by default.
• This centralizes block production power, defeating decentralization goals.

Even before a transaction reaches the chain, centralized RPC providers like Infura and Alchemy can censor at the API layer. Most dApps rely on them, creating a pre-consensus kill switch.

• Tier-1 RPCs serve the vast majority of dApp traffic.
• User wallets default to these endpoints, hiding the censorship.
• Solutions like decentralized RPC networks (e.g., POKT) are nascent.

Post-merge Ethereum's reliance on centralized relays like BloXroute and Flashbots Protect created a single point of censorship. Over 90% of post-merge blocks were initially compliant with OFAC lists, demonstrating systemic vulnerability.

• Centralized Chokepoint: A handful of relay operators control block inclusion.
• Client Diversity Failure: Majority of validators ran Geth, amplifying risk.

The long-term protocol solution is enshrined Proposer-Builder Separation, baking censorship resistance into the core protocol.

• Decentralized Block Building: Separates block construction from proposal, preventing validator-level filtering.
• Credible Commitment: Builders commit to blocks before knowing if they are selected, making censorship economically irrational.

Networks like Obol and SSV Network fragment validator keys across multiple nodes, creating a legal gray area for regulators.

• No Single Entity to Sue: Fault and signature distribution across independent operators.
• Byzantine Fault Tolerance: Requires a supermajority (e.g., 4-of-7) to censor, aligning technical and legal defenses.

Protocols can invert incentives by making censorship a slashable offense. This aligns validator profit motives with network health.

• Enforceable Social Consensus: Treats censorship as an anti-social MEV extraction.
• High-Cost Attack: Makes legal compliance more expensive than the stake-at-risk, forcing validators to choose exit over censorship.

Layer 2s like Arbitrum and Optimism inherit Ethereum's security but can implement their own transaction ordering rules, creating jurisdictional havens.

• Legal Firewall: Base layer validators cannot see or filter L2 transaction details.
• Experimentation Zone: Can adopt pro-privacy sequencers or encrypted mempools without Ethereum-level scrutiny.

Centralized exchanges like Coinbase and Lido control over 40% of staked ETH. If legally compelled, they could enforce network-wide censorship.

• Liquidity vs. Sovereignty Trade-off: Liquid staking derivatives increase centralization.
• Governance Capture: Large staking entities exert undue influence over protocol upgrades.

Early PoS narratives claimed validators couldn't be forced to censor due to decentralization. This ignores legal reality and the concentration of stake in regulated entities like Coinbase and Kraken.\n- Key Flaw: Assumes validators are sovereign individuals, not corporations.\n- Key Risk: Legal action can target the >33% of Ethereum stake held by US-regulated entities, creating a de facto compliance cartel.

Ethereum's core response: separate block building from block proposal. Builders create censored or uncensored blocks; proposers simply choose the most profitable.\n- Key Benefit: Decouples validator legal liability from transaction inclusion.\n- Key Mechanism: MEV-Boost and native PBS via EIP-4844 and Danksharding create a competitive builder market.

The endgame: make transaction content unknowable until after block inclusion. Projects like Shutter Network and EigenLayer's MEV Privacy use threshold encryption to blind builders.\n- Key Benefit: Builders cannot censor what they cannot see.\n- Key Challenge: Adds ~500ms-2s latency and requires a decentralized key management network.

If the base layer is compromised, applications route around it. UniswapX, CowSwap, and Flashbots SUAVE aggregate intents and settle via private channels or competing blockchains.\n- Key Benefit: User sovereignty moves to the application layer.\n- Key Mechanism: Solvers compete to fulfill intents, bypassing the public mempool entirely.

A protocol-level kill switch. If censorship is detected (e.g., OFAC blocks persist), the community can socially coordinate to slash compliant validators, burning their stake.\n- Key Benefit: Creates a catastrophic economic disincentive for coordinated censorship.\n- Key Risk: Requires extreme social coordination and could trigger a chain split.

We need a quantifiable measure. A composite score tracking: % of stake from regulated entities, builder market concentration, and % of blocks compliant with OFAC lists.\n- Key Benefit: Forces protocols to be transparent about their attack surface.\n- Key Entities: Chainscore Labs, Ethereum.org, and Rated.Network are pioneering these metrics.

In PoS, block production is permissioned. If >33% of stake complies with a sanction list, the chain can be soft-censored; >66% enables hard censorship or chain reorganization. This isn't theoretical—Ethereum's top 3 entities control ~50% of stake. The network's liveness is secure, but its credible neutrality is not.

Decouple block building from block proposing. Builders create full blocks, proposers (validators) simply choose the highest-paying header. This creates a competitive market where censoring builders are outbid by non-censoring ones. Ethereum's PBS roadmap (e.g., MEV-Boost) is a temporary fix; full enshrinement is the endgame to harden against regulatory capture.

Diversify across execution environments with different trust assumptions. Celestia-based rollups inherit data availability but choose their own prover set. Monolithic chains like Solana have different validator geography. Bitcoin L2s leverage a more politically resistant base layer. Don't bet on a single chain's social consensus.

Evaluate networks by their minimum viable cartel size. Look beyond Nakamoto Coefficient. Audit:

• Validator Client Diversity (Geth dominance)
• Geographic/Jurisdictional Distribution
• Staking Pool Decentralization (Lido, Coinbase)
• Inclusion Lists Adoption (e.g., Flashbots SUAVE) A chain is only as strong as its most coercible validator cluster.

Passive token holding isn't enough. Direct influence comes from running infrastructure or delegating to resistant operators. Back staking protocols that enforce geographic distribution and use minority clients. The real power—and risk—is at the consensus layer. This is an operational cost of doing business in a regulated future.

Architect applications that are agnostic to the underlying chain's compliance posture. Integrate intent-based bridges (Across, LayerZero) and DEX aggregators (CowSwap, UniswapX) that route around censored paths. Use encrypted mempools and threshold encryption for transaction privacy. Your stack must assume the base layer may fail.