April 19, 2024
Ethereum's Centralization Concerns: JPMorgan Highlights Risks in Recent Staking Surge
Altcoins News

Ethereum’s Centralization Concerns: JPMorgan Highlights Risks in Recent Staking Surge

According to JPMorgan, Ethereum’s recent staking increase has caused the network to become more centralized and the staking yield to decrease.

“The rise in Ethereum staking since the merger and Shanghai upgrades have come at a cost as the Ethereum network became more centralized and as the overall staking yield declined,” JPMorgan analysts led by Nikolaos Panigirtzoglou stated in a note on Thursday.

Staking was made possible by the Merge update, which was implemented in September 2022 and converted Ethereum from a proof-of-work network to a proof-of-stake blockchain. Staking increased after the Shanghai upgrade in April of 2023 because validators were able to withdraw staked ether that was locked in the network and reinvest.

Liquid stake providers like Lido are the main drivers of stake development. “The top 5 liquid staking providers control more than 50% of staking on the Ethereum network, and Lido specifically accounts for almost one-third,” analysts at JPMorgan stated. Although decentralized liquid staking platforms like Lido “involve a high degree of centralization,” they claimed.

“Needless to say centralization by any entity or protocol creates risks to the Ethereum network as a concentrated number of liquidity providers or node operators could act as a single point of failure or become targets for attacks or collude to create an oligopoly that would promote their interests at the expense of the interests of the community, e.g., by censoring certain transactions or by front-running on end users’ transactions,” the analysts later added.

The concept of rehypothecation, which includes utilizing liquidity tokens as collateral across different DeFi protocols concurrently, is another issue raised by the proliferation of liquid staking in addition to centralization, the experts added. According to them, if a staked asset’s value declines significantly or is compromised due to a malicious attack or a protocol fault, it might trigger a chain reaction of liquidations.

Staking profits have decreased as a result of Ethereum’s staking expansion, while returns on traditional financial assets have increased. “The total staking yield has declined from 7.3% before the Shanghai upgrade to around 5.5% currently,” they stated.

JPMorgan stated last month that despite the Shanghai upgrade, network activity on Ethereum has not met expectations. At the time, they reported reductions in Ethereum’s daily transactions, daily active addresses, and the overall value locked in for decentralized financial protocols on the network.

Image: Wallpapers.com

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