Data Giant Shocks Ethereum With Ban on Mining

Hetzner's Decision Spurs Debate About Decentralization of Crypto Infrastructure

By: Owen Fernau Loading...

Data Giant Shocks Ethereum With Ban on Mining

Struggles to decentralize have long shaped the development of smart contract and governance layers in the crypto ecosystem.

Last week something else struck: Hetzner, the second largest hosting provider for Ethereum, clarified that crypto miners may not use its server farms to support the blockchain network, or any other crypto venture.

‘Not Permitted’

“Using our products for any application related to mining, even remotely related, is not permitted,” Hetzner said in a message to its customers. It said both Proof-of-Stake and Proof-of-Work activities are prohibited. “Even if you run just one node, we consider it a violation of our [terms of service].”

The development highlighted the power of a centralized player in blockchain infrastructure. Hetzner, a 25-year-old company based in Gunzenhausen, Germany, is one of the biggest data center operators in Europe. It maintains hundreds of thousands of servers in Germany, Helsinki, and in Virginia in the U.S.

The company’s move underscored an additional risk for the Ethereum community.

“There is significant compute counterparty risk across all [Layer 1s] where a majority of the computers securing them run on any public cloud, Hetzner or not,” Chris McCoy, the co-creator of STORE, which aims to offer cloud computing services governed by token holders, told The Defiant. “Computer counterparty risk is a major major issue in Web3 except only a few of us really understand it.”

On Aug. 26, Hetzner’s Twitter account referred the public to its Reddit post in response to a tweet by Maggie Love, co-founder of W3bCloud, a company building data centers geared towards supporting what it calls the “web3 and blockchain economy.”

Love’s screenshot showed that 16.9% of Ethereum nodes are hosted on Hetzner’s servers, according to The number of Ethereum nodes hosting on Hetzner appears to have dropped 15% of nodes.

That Ethereum nodes are dependent on a company which may be hostile towards blockchain-enabling uses has long irked members of the DeFi community. Bitcoin proponent and influencer Anthony Pompliano was calling out Ethereum’s dependence on Amazon Web Services in 2020.

Still the problem has become an urgent priority as the teams behind many DeFi applications ban addresses that may be subject to sanctions by the U.S. Department of the Treasury’s Office of Foreign Assets Control. Earlier this month, the agency blacklisted Tornado Cash, the popular crypto “mixer” that anonymizes transactions, for allegedly laundering $7B worth of crypto.

Some Ethereum community members played down the centralization problem. Guillaume Ballet, an Ethereum core developer said while the situation is “scary” it would be easy for Ethereum miners or stakers to switch to other machines if a cloud services provider shuts down operations.

Still, it isn’t just Ethereum that is impacted by centralization of what McCoy called “public clouds.”

According to research published by STORE, nodes hosted on Hetzner account for 34% of the validators on Solana.

Hetzner is also the number one provider of node hosting services for Bitcoin, with 6% of nodes, according to STORE. Between 20 to 25% of the nodes for the world’s largest cryptocurrency rely on public clouds.

Further Debate

Jacob Gadikian works at Notional DAO, which provides validator services and uses Hetzner. Gadikian is overall a fan of Hetzner. “You can’t get the kind of product and service that you get from them anywhere else,” he said.

Gadikian said he is working to make contact with Hetzner’s executive team to clarify the companies’ stance on their solutions’ use by nodes in blockchain networks.

Even so, the Hetzner episode is bound to spur further debate about the push for decentralization in crypto infrastructure. “Everything from blockchain history to infrastructure to consensus to governance needs full stack trust minimization,” said STORE’s McCoy.