The recent surge in Ethereum staking following the Merge and Shanghai upgrades has come at a cost of increased centralization and lower staking yields, according to a new report by JPMorgan. The report, published on October 5th, highlighted the risks associated with Ethereum’s growing centralization.
JPMorgan analysts, led by senior managing director Nikolaos Panigirtzoglou, emphasized that the top five liquid staking providers, namely Lido, Coinbase, Figment, Binance, and Kraken, now control over 50% of staking on the Ethereum network. Lido alone accounts for almost one-third of the total staking. This concentration of power raises concerns about the decentralized nature of the Ethereum network.
Despite many in the crypto community viewing decentralized liquid staking platforms like Lido as alternatives to centralized exchanges like Coinbase and Binance, JPMorgan’s report pointed out that even these platforms have a high degree of centralization. In the case of Lido, a single node operator is responsible for over 7,000 validator sets or 230,000 Ether (ETH), which raises questions about decision-making and potential vulnerabilities.
The report highlighted a case where Lido’s decentralized autonomous organization (DAO) rejected a proposal to cap the staking share at 22% of Ethereum’s overall staking in order to prevent further centralization. This decision, made by a few wallet addresses controlling the DAO, demonstrates the concentration of power within the staking ecosystem.
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JPMorgan analysts warned that centralization, whether by entities or protocols, poses risks to the Ethereum network. A concentrated number of liquidity providers or node operators could become a single point of failure or become targets for attacks. Additionally, collusion among these entities could lead to the creation of an oligopoly, further challenging the decentralized ethos of the network.
Beyond increased centralization, the post-Merge Ethereum network has also witnessed a decline in staking yields. JPMorgan noted that the standard block rewards have decreased from 4.3% before the Shanghai upgrade to 3.5% currently. The total staking yield has also declined from 7.3% before the upgrade to around 5.5% currently. This decrease in staking rewards adds to the concerns about the viability and attractiveness of Ethereum staking.
It is worth mentioning that JPMorgan analysts are not the only ones who have observed a rise in network centralization following the Merge upgrade. The Merge, implemented on September 15th, 2022, has been seen as a significant drawback to Ethereum’s decentralization and a contributing factor to the decline in staking yields.
Vitalik Buterin, co-founder of Ethereum, has acknowledged that node centralization is a significant challenge for the network. In September 2023, he stated that finding a perfect solution to address this issue may take another 20 years. This admission underscores the complexity and long-term nature of resolving the centralization problems facing Ethereum.
In conclusion, the rise of Ethereum staking has led to concerns about increased centralization and lower staking yields. The dominance of a few liquid staking providers and the concentration of power within their platforms raise questions about the decentralized nature of the Ethereum network. Additionally, the decline in staking rewards further challenges the attractiveness of Ethereum staking. Resolving these issues will require ongoing efforts to enhance decentralization and explore alternative solutions.
