Centralization Risk

The risk that a small group of token holders or a core development team can unilaterally dictate protocol changes. This is often measured by metrics like the Nakamoto Coefficient, which indicates the minimum number of entities needed to control a majority of voting power. For example, in some early-stage DAOs, a handful of wallets can pass any proposal.

Reliance on centralized infrastructure providers creates systemic risk. Key examples include:

• RPC Node Providers: Most dApps and wallets rely on a few centralized RPC endpoints (e.g., Infura, Alchemy).
• Cloud Hosting: A majority of Ethereum nodes and validators run on cloud services like AWS.
• Staking Services: Centralized exchanges (CEXs) often control large portions of staked assets in Proof-of-Stake networks.

The risk posed when a blockchain's network health depends overwhelmingly on a single software client implementation. If a bug appears in the dominant client, it can cause a chain split or network outage. For instance, the Geth client has historically commanded over 70% of Ethereum's execution layer, representing a significant consensus risk.

Centralized control over transaction ordering, especially by block builders and relays in Proposer-Builder Separation (PBS) models, enables censorship and maximizes Maximal Extractable Value (MEV) for a few players. This can lead to transaction blacklisting and a degraded, unfair user experience.

The risk that a large percentage of a network's native token or staked assets is held by a few centralized custodians, such as major exchanges. This concentration gives these entities outsized influence over governance votes and market liquidity, and poses a security risk if the custodian is compromised.

The protocol's roadmap, critical updates, and bug fixes are controlled by a single company or a small, closed group of developers. This creates key person risk and can lead to conflicts of interest, stifled innovation, and potential protocol capture. True open-source, multi-client development mitigates this.

Concentration of hashing power (PoW) or staking capital (PoS) within a few large entities. This threatens the Nakamoto Coefficient, a measure of how many entities are needed to collude to compromise the network (e.g., censor transactions).

Dependence on centralized web services for core operations. Major risks include:

• RPC Providers: Most dApps and wallets rely on a handful of centralized RPC endpoints (e.g., Infura, Alchemy).
• Hosting: Front-ends and indexers often run on AWS, Google Cloud, or Cloudflare, creating a central point of censorship.

When decision-making power (e.g., protocol upgrades, treasury funds) becomes concentrated among a small group of whales, core developers, or venture capital firms. This undermines the credible neutrality of the protocol.

In Layer 2 rollups, the sequencer is a single entity that orders transactions. Most current rollups use a single, permissioned sequencer operated by the development team, creating a clear bottleneck and censorship point before achieving decentralized sequencing.

The DeFi ecosystem's heavy reliance on a single oracle network (like Chainlink) for price data creates a systemic risk. If the oracle fails or is manipulated, it can cause cascading liquidations and protocol insolvencies across hundreds of applications.

The risk that a small number of validators or miners control the majority of a network's hashing power or staking power. This can lead to 51% attacks, transaction censorship, or the ability to manipulate the consensus mechanism. For example, in early 2021, three mining pools controlled over 50% of Bitcoin's hashrate.

The risk that a protocol's on-chain governance system is dominated by a few large token holders (whales) or entities. This allows them to steer protocol upgrades, treasury funds, and parameter changes in their own interest, potentially against the network's long-term health. Vote delegation can exacerbate this by concentrating voting power.

The risk associated with a lack of client software diversity. If the vast majority of network nodes run the same client software (e.g., Geth for Ethereum), a single bug or vulnerability in that client could cause a chain split or network outage. This is a critical form of infrastructure centralization.

The risk that a DeFi protocol or smart contract depends on a single, centralized oracle for critical off-chain data (like asset prices). If the oracle fails, is manipulated, or censors data, it can lead to incorrect contract execution, liquidation cascades, or fund losses, as seen in historical exploits.

The risk from centralized private key custody, particularly with multi-signature (multisig) wallets controlling protocol treasuries or upgrade mechanisms. If the signers are colluding, coerced, or their keys are compromised, they can unilaterally drain funds or alter the protocol. This is common in many DAO treasuries.

The risk that core infrastructure (mining farms, validator nodes, development teams) is concentrated in a single jurisdiction. This makes the network vulnerable to regulatory crackdowns, legal pressure, or internet blackouts from that region, threatening network liveness and decentralization.