Ethereum's Inclusion Lists: Balancing Censorship and Regulation

A recent report from the Proof of Stake Alliance (POSA), co-authored by Khushi Wadhwa, Nikhil Raghuveera, and Jane Khodarkovsky, calls for the Ethereum community to evaluate the legal and policy implications of unconditional inclusion lists. This mechanism is proposed to enhance censorship resistance within the Ethereum network.

The report emphasizes the need for a detailed discussion regarding the effectiveness of these inclusion lists in upholding Ethereum's core principles of credible neutrality and censorship resistance.

Understanding Ethereum Inclusion Lists

Ethereum inclusion lists are designed to ensure that certain transactions are included in blocks, thereby preventing validators from excluding them based on their content or origin. The intent is to fortify Ethereum’s commitment to censorship resistance and credible neutrality, which are essential attributes of a decentralized blockchain.

However, the implementation of inclusion lists raises significant concerns regarding regulatory compliance and potential legal liabilities.

Regulatory Concerns and Censorship Resistance

Raghuveera, CEO at Predicate, expressed that the goals of censorship resistance may be compromised by the legal and policy ramifications associated with inclusion lists. As Ethereum moves towards a more structured transaction processing model, inclusion lists could subject validators, builders, and other network participants to increased regulatory scrutiny.

The ongoing debate revolves around reconciling this technical solution with Ethereum’s foundational ethos and the practical implications for those operating within regulated markets.

Defining Credible Neutrality

The report, which received input from the Ethereum Foundation, extends beyond technical discussions and delves into potential regulatory outcomes. Wadhwa, head of product research at Predicate, highlighted the importance of clearly defining credible neutrality to evaluate any proposed modifications to Ethereum. This definition is crucial for maintaining stability and protecting participants within the network.

Credible neutrality, a concept championed by Vitalik Buterin, serves as a guiding principle for Ethereum to ensure fairness and impartiality. In a decentralized context, any bias towards specific participants or transactions could erode trust. Therefore, credible neutrality is vital for fostering an open and decentralized network where all participants have equal opportunities, free from censorship.

Tensions Between Censorship Resistance and Regulation

A significant point raised in the report is the inherent tension between Ethereum’s censorship resistance objectives and the regulatory environments that many participants must navigate. This tension is central to the discussions within the POSA.

Mangiero, the executive director of POSA, noted that while the Ethereum community has engaged in various debates about inclusion lists, these discussions have not adequately addressed the legal and policy dimensions, which are critical in the crypto landscape.

Implications for Developers and Policymakers

The report suggests that developers and policymakers must carefully consider how inclusion lists could affect regulated entities. There is a risk that such lists might drive some participants out of specific markets or create new liability challenges.

The authors draw a parallel between Ethereum and TCP/IP, suggesting that the Ethereum base layer could remain neutral regarding the data it transmits. They argue that regulators may find it ineffective to target Ethereum's foundational infrastructure, as it merely facilitates the neutral transmission of data.

Potential Shifts in Regulatory Focus

The report posits that regulators might redirect their focus towards the application layer, where decentralized applications (dApps) often exhibit centralized control, making them more prone to regulatory oversight. This strategy aligns with traditional regulatory practices in technology and could provide a pathway for Ethereum to uphold its credible neutrality.

Conversely, there are concerns that regulators may not perceive inclusion lists as neutral. The authors caution that inclusion lists involve subjective decisions by proposers about which transactions to include, which could be seen as inherently biased.

Future Considerations and Engagement

The report concludes with a call for further research aimed at establishing a structured approach to Ethereum’s credible neutrality principles, with an emphasis on minimizing legal challenges. Researchers are encouraged to design solutions that enforce neutrality, ensuring equitable treatment of all transactions and maintaining a decentralized protocol.

Additionally, the report advocates for proactive engagement with policymakers to clarify the distinctions between blockchain infrastructure and specific applications. By educating stakeholders on the advantages of blockchains and fostering collaborative frameworks, Ethereum can promote innovation while addressing regulatory concerns.