The Decrease in Ethereum Network Decentralization
JPMorgan Chase & Co. has revealed that the Ethereum network’s decentralization has significantly decreased since the implementation of the Merge event and Shanghai upgrade.
The Rise of Staking and Centralization
Following the Merge and Shanghai upgrades, there has been a notable increase in staking activities on the Ethereum network. While staking has its benefits, such as supporting network operations, it has led to concerns about centralization.
Many members of the crypto community prefer decentralized liquid staking platforms like Lido over centralized ones. Lido aims to address centralization concerns by adding more node operators to prevent a single entity from controlling a significant portion of staked Ether (ETH).
However, centralization remains a risk. Concentration of liquidity providers or node operators could result in a single point of failure or collusion, undermining the interests of the broader Ethereum community. JPMorgan is also highlighting concerns about declining staking yields.
The Menace of Rehypothecation
A report from JPMorgan also highlights the issue of rehypothecation. This practice involves reusing liquidity tokens as collateral across multiple decentralized finance (DeFi) protocols simultaneously.
If the value of a staked asset sharply declines or faces security breaches or protocol errors, rehypothecation could trigger liquidations that jeopardize the stability of the DeFi ecosystem.
The report also mentions that increased staking has diminished Ethereum’s appeal from a yield perspective, especially compared to rising yields in traditional financial assets. The total staking yield has dropped from 7.3% before the Shanghai upgrade to approximately 5.5%.
Ethereum Improvement Proposal for Slowing Ether Staking
Ethereum’s core developers have introduced an Ethereum Improvement Proposal (EIP-7514) as part of the upcoming Dencun upgrade, scheduled for activation in October 2023. This proposal aims to slow down the rate of Ether staking, giving the Ethereum community more time to devise a practical reward scheme for stakers.
ETH Price Analysis
Currently, the price of Ethereum (ETH) is $1,629, reflecting a 3.4% decline on the weekly timeframe. The Relative Strength Index (RSI) for ETH is at 40.4.
The price of ETH is struggling to maintain the $1600 level after facing rejection at the $1700 resistance level. Failure to hold the $1600 level could potentially lead to a further decline to the $1500 level.
Hot Take: Concerns Over Ethereum’s Centralization and Declining Staking Yields
JPMorgan’s report sheds light on two significant concerns regarding Ethereum: centralization and declining staking yields. The increase in staking activities has led to a more centralized network, with potential risks of concentration among liquidity providers and node operators.
Furthermore, rehypothecation poses a threat to the stability of the DeFi ecosystem if staked assets experience value declines or security breaches. Additionally, Ethereum’s appeal from a yield perspective has diminished compared to traditional financial assets.
To address these concerns, Ethereum’s core developers have proposed slowing down Ether staking through an upcoming upgrade. This will give the community time to develop a practical reward scheme for stakers.
As for ETH’s price analysis, it currently faces resistance at $1700 and struggles to hold the $1600 level. A failure to maintain this support could lead to further declines.
By
By
By
By