Ethereum’s Staking Growth Leads to Centralization and Declining Yields, Says JPMorgan
According to JPMorgan analysts, the recent growth in Ethereum staking has resulted in increased centralization of the network and a decrease in staking yields. The Merge upgrade, implemented in September 2022, transitioned Ethereum from a proof-of-work network to a proof-of-stake blockchain, enabling staking. The subsequent Shanghai upgrade in April of this year allowed validators to withdraw staked ether and reinvest, leading to a surge in staking.
Lido and Centralization Concerns
One of the main contributors to the growth of staking is liquid staking providers like Lido. However, JPMorgan analysts point out that these providers have raised concerns about centralization. The top five liquid staking providers control over 50% of staking on the Ethereum network, with Lido accounting for almost one-third. While platforms like Lido are decentralized, they still involve a significant degree of centralization.
JPMorgan emphasizes that centralization poses risks to the Ethereum network as it concentrates power in a few entities or protocols. This concentration can result in single points of failure, vulnerability to attacks, or collusion among liquidity providers or node operators. These actions could harm the interests of the community, such as censoring transactions or front-running user transactions.
Another concern arising from the growth of liquid staking is rehypothecation—using liquidity tokens as collateral across multiple DeFi protocols simultaneously. If a staked asset’s value drops sharply or is subject to hacking or protocol errors, this practice could trigger a cascade of liquidations.
Declining Staking Yield
The growth in Ethereum staking has also led to a decline in staking rewards compared to the increasing yields offered by traditional financial assets. JPMorgan notes that the total staking yield has dropped from 7.3% before the Shanghai upgrade to around 5.5% currently.
Last month, JPMorgan highlighted Ethereum’s underwhelming network activity following the Shanghai upgrade. Daily transactions, daily active addresses, and the total value locked in decentralized finance protocols on the network all experienced declines.
Hot Take: Challenges Ahead for Ethereum Staking
Ethereum’s staking growth has brought both advantages and challenges to the network. While staking allows users to participate in securing the blockchain and earn rewards, it has also resulted in increased centralization and declining yields. The concentration of power among a few providers raises concerns about potential risks and malicious activities.
Furthermore, the practice of rehypothecation in liquid staking introduces additional vulnerabilities to the system. As Ethereum continues to evolve and address these challenges, it will be crucial to find ways to maintain decentralization, enhance security measures, and optimize staking rewards to ensure the long-term sustainability and success of the network.
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