Increased Ethereum Staking Activities Leads to Centralization, say JPMorgan Analysts
Increased Ethereum staking, especially post-Merge and Shanghai upgrades, has caused more centralization and lower staking yields, says a JPMorgan report. Major liquid staking providers like Lido, Coinbase, Figment, Binance, and Kraken are chiefly responsible for this surge.
Ethereum’s journey to staking began with the Merge upgrade in September 2022, which transitioned Ethereum from Proof of Work to Proof of Stake. This significant upgrade enabled staking, an activity that intensified after the Shanghai upgrade in April of this year. The upgrade granted validators the ability to withdraw staked ether locked in the network and reinvest it, leading to a surge in staking.
An alarming concern mentioned by the JPMorgan analysts is the apparent centralization of these staking activities. The top five liquid staking providers now control over 50% of Ethereum’s staking. What’s more worrisome, they point out, is that Lido alone accounts for almost one-third of these activities
This tendency towards centralization presents a potential risk to the Ethereum network, as the concentration of liquidity providers or node operators could act as a single failure point or become targets for attacks.
Notably, the practice of rehypothecation — where liquidity tokens are used as collateral across multiple DeFi protocols at the same time — was also pointed out as a potential risk factor. This practice could trigger a cascade of liquidations if a staked asset sharply drops in value or is compromised due to malicious attacks or protocol errors.
Alongside centralization, there has also been a marked decline in Ethereum’s staking rewards compared to increasing yields offered by traditional financial assets. The total staking yield has declined from 7.3% before the Shanghai upgrade to around 5.5% currently, the JPMorgan analysts note. Ethereum’s network activity has allegedly not lived up to expectations following the Shanghai upgrade, with decreases recorded in daily transactions, active addresses, and total value locked of decentralized finance protocols on the network.
These worrying trends, coupled with Ethereum co-founder Vitalik Buterin‘s admission that node centralization is one of Ethereum’s main challenges, paints a troublesome picture for Ethereum’s future. Buterin has also stated that finding a robust solution for this problem could take another 20 years.
