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Ethereum co-founder Vitalik Buterin has proposed a new framework to incentivize Ethereum decentralization by penalizing correlated failures among validators.

According to the research proposal submitted by Buterin, large-scale staking groups, and organizations have an undue advantage over smaller players, creating an imbalance in the decentralized staking sector.

The theory is that if you are a single large actor, any mistakes that you make would be more likely to be replicated across all identities that you control, even if you split your coins up among many nominally-separate accounts, the Ethereum co-founder said.

Buterin suggests that validators controlled by the same entity should receive a higher penalty if they fail together, compared to failing independently. The theory behind this approach is that mistakes made by a single large actor are more likely to be replicated across all the identities they control.

Staking pools and liquid staking services such as Lido remain popular among users, given how their platform allows for the participation of more stakers due to the lower amount of entry (in ETH). To date, Lido currently has an estimated $34 billion worth of ETH staked, representing around 30% of the total supply. Advocates and developers pushing for Ethereum decentralization have previously cautioned against Lidos dominance and the potential for cartelization, where outsized profits can be extracted compared to non-pooled capital.

Buterins analysis of recent attestation data revealed that validators within the same cluster, such as a staking pool, are more likely to experience correlated failures, likely due to shared infrastructure. To address this issue, he proposed penalizing validators proportionally to the deviation from the average failure rate. If many validators fail in a given slot, the penalty for each failure would be higher.

Based on simulations of this scenario, such a system could reduce the advantage of large Ethereum stakers over smaller ones, as large entities are more likely to cause spikes in the failure rate due to correlated failures.

The proposals potential benefits include incentivizing Ethereum decentralization by encouraging separate infrastructure for each validator and making solo staking more economically competitive relative to staking pools. Buterin notes that other options could be subjected to further analysis. This includes variations on the penalty schemes in order to minimize the average big validators advantage over smaller validators.

According to Buterin, its also worth examining the impact of such a framework in terms of geographic and client decentralization. However, he did not mention the possibility of reducing the solo staking amount from the current 32 Ether (ETH) or approximately $111,000 based on Ethers current price at roughly $3,500.

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Vitalik Buterin pushes for anti-correlation incentives in Ethereum staking - Crypto Briefing