Crypto News– JPMorgan, in a recent analysis, has pointed out that Ethereum’s notable surge in staking activities, driven by the Merge and Shanghai upgrades, has come at the expense of increased centralization and declining staking returns.
JPMorgan Reports Increased Centralization in Ethereum Due to Surge in Staking
The Merge upgrade, implemented in September 2022, marked Ethereum’s transition from a proof-of-work to a proof-of-stake blockchain, introducing staking opportunities. Subsequently, the Shanghai upgrade in April of the following year allowed validators to withdraw staked Ether from the network and reinvest, contributing to the staking boom.
JPMorgan’s analysts, led by Nikolaos Panigirtzoglou, noted that liquid staking providers, such as Lido, played a significant role in driving staking growth. They pointed out that the top 5 liquid staking providers now collectively control over 50% of the staking activities on the Ethereum network, with Lido accounting for nearly one-third of this total. Despite being categorized as decentralized, platforms like Lido exhibit a concerning degree of centralization, according to the analysts.
The analysts expressed apprehensions regarding centralization, emphasizing that any concentration of power within a single entity or protocol poses risks to the Ethereum network. A concentrated number
of liquidity providers or node operators could potentially act as single points of failure or become vulnerable targets for attacks or collusion that might establish an oligopoly prioritizing their interests over the community’s interests. This could manifest in actions like censoring specific transactions or front-running end-user transactions.
Another concern raised by JPMorgan in the context of growing liquid staking is the practice of rehypothecation, which involves using liquidity tokens as collateral across multiple DeFi protocols concurrently. The analysts warned that this practice could trigger a cascade of liquidations if a staked asset experiences a sharp decline in value or falls victim to hacking, or slashing due to malicious attacks, or protocol errors.
In sum, JPMorgan’s analysis underscores the evolving challenges associated with Ethereum’s staking ecosystem, emphasizing the need for careful monitoring and potential mitigation measures to address centralization and systemic risks.
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