S&P Global Warns of Concentration Risks with Spot Ethereum ETFs
Approving proposed Spot Ethereum ETFs in the US could worsen the network’s concentration issue, according to S&P Global. These ETFs seek to boost yield by staking the underlying ether, which involves validators securing a specific quantity of ether as collateral. While Spot Ether ETFs that only hold ether won’t impact Ethereum’s consensus mechanism, those that involve staking could centralize staked tokens among a few providers, especially with substantial inflows. Non-US Ether ETFs incorporating staking already exist, with around $800 million in assets under management. The SEC is currently assessing eight applications for Spot Ether ETFs, and a decision is expected by May 23.
SEC Decision Deadline Nears for Spot Ethereum ETFs
The SEC is currently assessing eight applications for Spot Ether ETFs, with the initial decision deadline set for May 23, 2024. Analysts at Bernstein indicate a 50% likelihood of an ETH ETF approval by May, with a near certainty expected by year-end. S&P noted that the trading volume of US spot bitcoin ETFs reached $12 billion one month after approval as of Feb. 14. Based on this data, the analysts suggested that US Spot Ether ETFs including staking “could become large enough to change validator concentrations in the Ethereum network.” This potential shift could expose the network to risks like inactivity due to a single point of failure or malicious collusion.
Coinbase Eyes Bigger Pie?
Coinbase serves as a custodian for 8 out of the 11 recently approved US bitcoin ETFs and is identified as a staking entity in three out of the four largest Ether staking ETFs outside the US. S&P Global estimates that Coinbase controls 14.4% of validators on Ethereum, while decentralized staking protocol Lido’s share is higher at 31.7%. However, US institutions launching Ether staking ETFs are unlikely to directly interact with decentralized protocols like Lido. Instead, they are expected to choose institutional digital asset custodians like Coinbase to mitigate risks associated with validator concentration. The emergence of new custodians may enable ETF issuers to spread their stakes across different entities and mitigate concentration risks.
Hot Take: Spot Ether ETF Applications Prompt Concerns
S&P Global’s warning about concentration risks with Spot Ethereum ETFs highlights the potential impact of staking on the network’s validator mix. While ETFs that only hold ether won’t disrupt Ethereum’s consensus mechanism, those involving staking could centralize staked tokens among a few providers. This could lead to risks such as inactivity due to a single point of failure or malicious collusion. The SEC’s decision on Spot Ether ETFs is eagerly awaited, with analysts predicting a high likelihood of approval. As the crypto market continues to evolve, it will be crucial to address concentration risks and ensure the stability and decentralization of blockchain networks.
By
By
By