A new report from JP Morgan said that the rise in staking on Ethereum since the mainnet upgrades, Merge and Shanghai, has come at the expense of increased centralization and lower staking returns.
JPMorgan analysts, led by Senior Managing Director Nikolaos Panigirzoglou, issued a new investment note on October 5, warning of risks stemming from Ethereum’s increasing centralization.
JP Morgan analysts noted in the report that the five largest liquid staking providers: Lido, Coinbase, Figment, Binance, and Kraken, control more than 50% of staking on the Ethereum network, adding that Lido alone accounts for nearly a third.
Analysts stated that the cryptocurrency community has viewed decentralized liquid staking platform Lido as a better alternative to centralized staking platforms tied to centralized exchanges like Coinbase or Binance. However, in practice, “even decentralized liquid storage platforms involve a high degree of centralization,” the JPMorgan report said, adding that a single Lido node operator accounts for more than 7,000 validator sets or 230,000 ether (ETH).
These node operators are selected by the Lido Decentralized Autonomous Organization (DAO), which is controlled by a small number of wallet addresses, “making the Lido platform fairly centralized in the decision-making process,” the analysts wrote. The report mentioned a case where Lido’s DAO rejected a proposal to set the staking share at 22% of the total Ethereum stake to avoid centralization.
“Lido did not participate in the initiatives as its DAO rejected the proposal by an overwhelming 99% majority,” JPMorgan analysts wrote, adding:
“It goes without saying that centralization by any entity or protocol creates risks to the Ethereum network as a concentrated number of liquidity providers or node operators can act as a single point of failure, become targets of attacks, or collude to create an oligopoly. […]”
Aside from high centralization, post-merger Ethereum is also associated with an overall decrease in staking yield, JP Morgan noted. Standard block rewards fell from 4.3% before the Shanghai upgrade to 3.5% currently, the analysts wrote. The total mortgage yield fell from 7.3% before Shanghai’s upgrade to about 5.5% currently, the report added.
Related: It’s Time to ‘Pull the Brakes’ on Ethereum and Return to Bitcoin: K33 Report
JPMorgan analysts are not the only Ethereum observers who have noticed a significant increase in network centralization following the Merge upgrade. The merger was implemented on September 15, 2022, and is seen as a major barrier to decentralization in Ethereum and a major reason for declining returns.
You are the crop pic.twitter.com/ONJT6QmDch
– Pledditor (@Pledditor) October 5, 2023
Ethereum co-founder Vitalik Buterin admitted that node centralization is one of the main challenges facing Ethereum. In September 2023, he said that finding the perfect solution to address this problem could take another 20 years.
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