Ethereum co-founder Vitalik Buterin wants to improve decentralization on the Ethereum network by modifying its penalty system, he wrote in a recent blog post.

And funny enough, he posted about it on Twitter after being asked by Elon Musk why he hasn't been using the platform.

The Ethereum network uses a proof of stake consensus mechanism, where validators secure the network by staking ETH. In exchange for processing transactions, the validators earn rewards. But if they fail to do their job—accidentally or intentionally—they can be fined and lose a portion of their staked Ethereum.

Buterin's proposal addresses the issue of large stakers or pools, which might control multiple validators from the same infrastructure, leading to a risk of correlated failures. At the time of writing, Lido runs what is by far the largest ETH staking pool, according to a Dune Analytics dashboard. Lido accounts for more than 302,000 validators, followed by Coinbase which accounts for another 142,000 validators.

Each validator requires 32 ETH (worth $114,485.76 at the time of writing) to be staked. But the pooled staking providers allow people to stake any amount of ETH and collect a proportionate size of the rewards—minus fees, of course.

"The theory is that larger stakers, including both wealthy individuals and staking pools, are going to run many validators on the same internet connection or even on the same physical computer, and this will cause disproportionate correlated failures," Buterin writes. Therefore, he reasons, large stakers and pools should face a higher penalty.

Buterin's solution is to incentivize physical decentralization by increasing penalties for simultaneous failures among validators that are likely controlled by the same entity.

It draws on data analysis showing that validators within the same cluster are more prone to failing together compared to those in different clusters. By implementing penalties that scale with the degree of correlation in failures, the system aims to discourage the centralization of validator operations.

The proposed penalty mechanism adjusts the severity of penalties based on the average rate of missed attestations, making it less economically viable for large stakers to run multiple validators on shared infrastructure. Buterin wrote that he hopes his proposal will better balance the economic incentives, encouraging a more distributed and resilient network.

But he also was quick to say that this likely isn't a perfect, ready-to-implement idea. The blog also highlights the need for further research on this topic to refine the penalty system and ensure it effectively promotes decentralization without unintended consequences.