Ethereum’s recent surge in ether (ETH) staking, driven by the Merge and Shanghai upgrades, has prompted concerns about centralization and reduced staking returns, according to a report released by JPMorgan on Thursday.
In contrast to decentralized alternatives like Lido’s liquid staking platform, the growing centralization within Ethereum raises security and decentralization concerns for the network.
Analysts, led by Nikolaos Panigirtzoglou, noted that many in the crypto community viewed Lido, a decentralized liquid staking platform, as a superior choice when compared to centralized alternatives linked to centralized exchanges. Lido has made efforts to decentralize by distributing its staked ETH among multiple node operators.
However, the report emphasized the risks linked to centralization. These risks include the potential for a limited number of liquidity providers or node operators to become single points of failure, susceptible to attacks, or forming harmful oligopolies that could harm the community.
The rise of liquid staking has also introduced the risk of rehypothecation, where liquidity tokens are used as collateral across multiple decentralized finance (DeFi) protocols simultaneously. This could result in a chain reaction of liquidations if a staked asset’s value drops sharply or if it is compromised due to a malicious attack or protocol error.
Furthermore, the report pointed out that the increased staking activity has made ether less attractive from a yield perspective, especially when compared to rising yields in traditional financial assets.
Ethereum’s total staking yield has decreased from 7.3% before the Shanghai upgrade to around 5.5%, reflecting the evolving dynamics in the crypto investment landscape.
According to YCharts, the yield rate for 2-year US treasuries has risen to over 5%, aligning with the overall trend of rising interest rates.
Although staking is technically accessible to anyone, setting up a staking node and entering the staking arena from scratch requires holding 32 ETH (equivalent to $52,000). Users with fewer holdings must rely on centralized staking providers, which handle the financial and technical aspects in exchange for a share of the profits. Currently, Lido is the largest of these providers, controlling 8.9 million ETH out of the total 30.7 million ETH locked in the network’s staking contract.
Another group of centralized firms, including Coinbase, Kraken, and Binance, collectively control over 5 million staked ETH, as reported by Glassnode.