The Risks of Ethereum’s Growing Centralization and Lower Staking Yields
A recent report by JPMorgan highlights the rise of Ethereum staking following major network upgrades, the Merge and Shanghai. However, this increase in staking has come at a cost: higher centralization and lower staking yields. JPMorgan analysts warn about the risks associated with Ethereum’s growing centralization.
Top Liquid Staking Providers Control Over 50% of Staking
JPMorgan analysts note that the top five liquid staking providers, namely Lido, Coinbase, Figment, Binance, and Kraken, control over 50% of staking on the Ethereum network. Lido alone accounts for almost one-third of this control. While Lido is seen as a decentralized alternative to centralized staking platforms like Coinbase or Binance, it still involves a high degree of centralization.
Lido’s Centralized Decision Making
Lido’s decentralized autonomous organization (DAO) selects node operators who account for a significant portion of Ethereum’s staking. The DAO is controlled by a few wallet addresses, making Lido’s platform rather centralized in its decision making. JPMorgan’s report mentions a case when Lido’s DAO rejected a proposal to cap the staking share at 22%, highlighting the risks associated with centralization.
Overall Staking Yield Decline
In addition to centralization concerns, post-Merge Ethereum has experienced an overall decline in staking yields. JPMorgan notes that standard block rewards have decreased from 4.3% before the Shanghai upgrade to 3.5% currently. The total staking yield has also declined from 7.3% before the upgrade to around 5.5% currently.
Ethereum’s Decentralization Challenge
It’s not just JPMorgan who has noticed the increase in network centralization following the Merge upgrade. Ethereum co-founder Vitalik Buterin has acknowledged that node centralization is one of Ethereum’s main challenges. Finding a solution to this problem may take another 20 years, according to Buterin.
Hot Take: Ethereum’s Growing Centralization Poses Risks to Network Security
The rise of Ethereum staking has led to higher centralization and lower staking yields. With the top liquid staking providers controlling over 50% of staking on the network, there are concerns about the concentration of power and decision making. This centralization creates risks such as single points of failure and potential collusion. Additionally, the overall staking yield has declined post-Merge. These issues highlight the challenges Ethereum faces in maintaining decentralization and ensuring network security.
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