The Risks of Ethereum’s Increasing Centralization
Ethereum’s recent surge in ether (ETH) staking, fueled by the Merge and Shanghai upgrades, has raised concerns about centralization and reduced staking yields, according to a report by JPMorgan [1]. While alternatives like Lido’s decentralized liquid staking platform exist, the growing centralization of Ethereum poses risks to the network’s security and decentralization ethos [1].
“Many in the crypto community had seen Lido, a decentralized liquid staking platform as a better alternative compared to the centralized liquid staking platforms associated with centralized exchanges.”
Analysts led by Nikolaos Panigirtzoglou [1]
Lido has taken steps to decentralize by distributing its staked ETH among multiple node operators. However, the report emphasizes the risks involved with centralization, including the potential for a few liquidity providers or node operators to become single points of failure, vulnerable targets for attacks, or collaborators forming oligopolies detrimental to the community [1].
The rise of liquid staking has also introduced the risk of rehypothecation, where liquidity tokens are reused as collateral across multiple decentralized finance (DeFi) protocols simultaneously. This practice could lead to a cascade of liquidations if a staked asset experiences a sharp decline in value, is hacked, or is slashed due to a malicious attack or protocol error [1].
Diminished Yield Perspective and Accessibility Challenges
In addition to centralization concerns, the report highlights how increased staking activity has affected the attractiveness of ether from a yield perspective. Ethereum’s total staking yield has declined from 7.3% before the Shanghai upgrade to approximately 5.5%, reflecting the evolving market dynamics and changing landscape of crypto investments [1].
While staking technically remains accessible to anyone, the requirement of holding 32 ETH ($52,000) to set up a staking node poses a barrier for many. Individuals with smaller holdings must turn to centralized staking providers who handle the financial and technical aspects of staking in exchange for a portion of the profits [1]. Currently, Lido stands as the largest provider, controlling 8.9 million ETH out of the total 30.7 million ETH locked in the network’s staking contract. Other centralized firms like Coinbase, Kraken, and Binance collectively control over 5 million staked ETH [1].
Ultimately, as Ethereum continues to evolve and adapt to changing market dynamics, addressing concerns around centralization and exploring solutions to maintain attractive yields will be crucial for the network’s long-term growth and success.
