A recent report by JPMorgan has shed light on the rising concerns surrounding Ethereum staking in the wake of major network upgrades such as the Merge and Shanghai. While these upgrades have brought about several positive changes to the Ethereum network, they have also come at a cost. The report highlights two key issues: the increasing centralization of staking and the decline in staking yields.
JPMorgan analysts have identified the top five liquid staking providers on the Ethereum network: Lido, Coinbase, Figment, Binance, and Kraken. Surprisingly, these five providers control over 50% of the total staking on the network. Among them, Lido alone accounts for almost one-third of the total staking. While the crypto community has viewed Lido as a decentralized alternative to centralized staking platforms, JPMorgan’s report argues that even Lido, a decentralized liquid staking platform, exhibits a significant degree of centralization.
According to the report, a single node operator within Lido controls more than 7,000 validator sets or 230,000 Ether (ETH). These node operators are selected through Lido’s decentralized autonomous organization (DAO), which is controlled by a few wallet addresses. This concentration of decision-making power raises concerns about centralization within Lido’s platform. The report also mentions an incident where Lido’s DAO rejected a proposal to cap the staking share at 22% to prevent further centralization.
The analysts highlight that centralization, regardless of the entity or protocol, poses risks to the Ethereum network. A concentrated number of liquidity providers or node operators could become targets for attacks, act as single points of failure, or collude to form an oligopoly. These risks can potentially undermine the decentralized nature of the Ethereum network.
In addition to the challenges of centralization, post-Merge Ethereum has experienced a decline in staking yields. JPMorgan points out that the standard block rewards have decreased from 4.3% before the Shanghai upgrade to 3.5% currently. This decline reflects a reduction in rewards for staking participants. Moreover, the total staking yield has also decreased from 7.3% before the Shanghai upgrade to approximately 5.5% at present.
The decline in staking yields could discourage participants from actively engaging in staking activities. Lower rewards diminish the incentive for users to lock up their ETH and contribute to the network’s security. It is essential to address this trend to ensure the continued growth and stability of the Ethereum ecosystem.
JPMorgan’s observations align with other Ethereum experts who have also identified the growing centralization and decreasing yields in the network. The Merge, which took place in September 2022, has been viewed as a significant obstacle to Ethereum’s decentralization. Ethereum co-founder Vitalik Buterin himself has acknowledged that node centralization poses one of the main challenges for the Ethereum network. He believes that solving this issue may take up to 20 more years.
It is essential for the Ethereum community, including developers, stakeholders, and users, to address these challenges collectively. Finding innovative solutions to promote decentralization and maintain attractive staking yields is crucial for the long-term success and sustainability of Ethereum.
JPMorgan’s report raises valid concerns regarding the increasing centralization of Ethereum staking and the decline in staking yields. The concentration of staking power within a few entities poses risks to the network’s security and decentralization. Additionally, the lowering of staking rewards may discourage participants from actively engaging in staking activities. As Ethereum continues to evolve and face these challenges, it becomes imperative for the community to explore and implement solutions that promote decentralization and ensure attractive yields for stakers.