According to a Thursday report from JPMorgan, the recent surge in Ethereum (ETH) stake, fueled by the Merge and Shanghai updates, has raised concerns about centralization and reduced overall stake returns.
Despite decentralized alternatives like Lido’s liquid staking platform, Ethereum’s growing centralization poses risks to the security and decentralization of the network.
“Many members of the crypto community had seen Lido, a decentralized liquid stake platform as a better alternative compared to centralized liquid stake platforms associated with centralized exchanges,” wrote analysts led by Nikolaos Panigirtzoglou.
Lido has made individual efforts to decentralize by splitting its staked ETH among multiple node operators.
However, the report highlighted the risks associated with centralization, including the potential for a small number of liquidity providers or node operators to act as single points of failure, vulnerable targets for attack or partners forming oligopolies harmful to the community.
The increase in liquid participation has also introduced the risk of rehypothecation, where liquidity tokens are reused as collateral in multiple decentralized finance (DeFi) protocols simultaneously.
“The rehypothecation could then lead to a cascade of liquidations if a staked asset drops dramatically in value or is hacked or cut due to a malicious attack or protocol error,” the note said.
Additionally, the report noted that increased staking activity has diminished ether’s appeal from a yield perspective, especially when compared to rising yields on traditional financial assets.
Real Ethereum performance
Ethereum’s total stake return has declined from 7.3% before the Shanghai update to about 5.5%, reflecting the changing landscape of crypto investments amid evolving market dynamics.
In accordance with YChartsthe yield on 2-year US Treasuries has risen to more than 5%, in line with rising interest rates overall.
Although staking is technically accessible to anyone, you need to have 32 ETH ($52,000) to set up a staking node and enter the staking arena from scratch. Users with smaller stakes must access ETH staking through a centralized stake provider that takes the financial and technical burden off their users’ shoulders in exchange for a cut of their profits.
Lido is currently the largest of these providers, controlling 8.9 million ETH of the total 30.7 million ETH locked in the network participation contract.
According to Glassnode, another set of centralized companies, including Coinbase, Kraken, and Binance, collectively control more than 5 million ETH stakes.