Decentralised law enforcement: A case study of Ethereum’s proof of stake mechanism for moderation practices

Abstract

This paper examines the evolving role of the Ethereum blockchain's consensus layer as a potential tool for decentralised law enforcement, with a focus on its Proof-of-Stake (PoS) mechanism and its implications for moderation practices. While it was traditionally designed for credible neutrality, Ethereum's consensus layer is now facing increasing pressure to assist in regulatory enforcement, particularly concerning the U.S. OFAC sanction list. This shift raises fundamental questions about whether a decentralised platform can effectively meet regulatory requirements without compromising its core principles of transparency, security, decentralisation and censorship resistance. This paper dives into the roles and incentives of actors in the consensus mechanism, with a main focus on builders, relays and validators. It also looks into the complexities introduced by Maximal Extractable Value (MEV) and the Proposer-Builder Separation (PBS). The paper critically assesses Ethereum's potential to function as a regulatory enforcement tool by discussing its inherent limitations, the current stance on adhering to OFAC sanction lists, and other relevant decision-making factors. It also considers the risks associated with leveraging this decentralised platform for regulatory purposes, including the potential for unintended consequences such as privacy and security concerns, and the erosion of core values. Ultimately, this paper aims to provide insights into whether Ethereum can effectively be leveraged as a regulatory enforcement technology while maintaining its fundamental attributes. We find that Ethereum can leverage compliance to a certain degree, particularly through mechanisms that incentivise validators to exclude sanctioned transactions, and with simple regulation to adhere to. However, the platform's decentralised nature and commitment to censorship resistance means that complete alignment with traditional regulatory frameworks is unlikely. This highlights the fundamental trade-offs that are inherent to attempting to impose centralised control on a decentralised system.