JPMorgan report warns that Ethereum network is becoming more centralized due to increased Ether staking.
Following the Merge and the Shanghai hard fork, the Ethereum network is showing signs of growing centralization, as pointed out in a recent JPMorgan report. The Wall Street giant observes that the increase in Ether used for staking represents a development that concentrates both wealth and, in the context of a Proof-of-Stake system, decision-making power.
What is staking?
Staking is a term used to describe the act of locking cryptocurrencies in a wallet to support blockchain network operations, like validating transactions. In return for this service, individuals participating in staking receive yield in the form of additional cryptocurrencies. JPMorgan suggests that Lido, a decentralized platform for staking, might be a preferable solution compared to the centralized options proposed by various exchanges.
The Centralization problem
Although Lido has integrated many operators within it to prevent a single entity from controlling too much Ether, JPMorgan warns that this concentration of resources could pose various risks. Among these, the possibility that Ethereum becomes more susceptible to attacks and that operators might collaborate to advance their interests to the detriment of the community. Another related problem is “redistributed illiquidity“, where liquidity tokens are reused as collateral through various DeFi protocols simultaneously.
Implications of centralization
The report further suggests that centralization could have repercussions on the attractiveness of Ether staking as an investment option. According to JPMorgan, the average yield from Ether staking has dropped from 7.3% prior to the Shanghai upgrade to 5.5%. This could disincentivize investors, especially in a context where returns on traditional financial assets are increasing.
