The rise in ethereum staking since major network upgrades Merge and Shanghai has come at the cost of greater centralization and lower staking returns, according to a new report from JPMorgan.
JPMorgan analysts, led by senior managing director Nikolaos Panigirtzoglou, issued a new note to investors on October 5, warning of the risks stemming from ethereum‘s increasing centralization.
The top five liquid staking providers – Lido, Coinbase, Figment, Binance and Kraken – control more than 50% of staking on the ethereum network, JPMorgan analysts noted in the report, adding that Lido alone accounts for almost a third.
Analysts mentioned that the crypto community has seen the Lido decentralized liquid staking platform as a better alternative to centralized staking platforms associated with centralized exchanges like Coinbase or Binance. However, in practice, “even decentralized liquid staking platforms involve a high degree of centralization,” the JPMorgan report says, adding that a single Lido node operator represents more than 7,000 sets of validators or 230,000 Ether (eth). ).
These node operators are selected by Lido’s decentralized autonomous organization (DAO), which is controlled by a few wallet addresses, “making the Lido platform fairly centralized in its decision-making,” the analysts wrote. The report mentioned a case where the Lido DAO rejected a proposal to limit staking participation to 22% of total ethereum stakes to prevent centralization.
“Lido did not participate in the initiatives as its DAO rejected the proposal by an overwhelming majority of 99%,” the JPMorgan analysts wrote, adding:
“It goes without saying that centralization by any entity or protocol creates risks for the ethereum network, as a concentrated number of liquidity providers or node operators could act as a single point of failure or become the target of attacks or collude to create an oligopoly (…)”
In addition to increased centralization, post-merger ethereum is also associated with an overall decline in staking returns, JPMorgan noted. Standard block rewards decreased from 4.3% before the Shanghai upgrade to 3.5% today, the analysts wrote. Total betting returns have decreased from 7.3% before the Shanghai update to around 5.5% currently, the report added.
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JPMorgan analysts are not the only ethereum watchers who have noted a significant increase in network centralization following the Merge upgrade. Executed on September 15, 2022, the merger has been seen as a major impediment to ethereum‘s decentralization and a major reason for falling returns.
you are the performance pic.twitter.com/ONJT6QmDch
—Pledditor (@Pledditor) October 5, 2023
ethereum co-founder Vitalik Buterin admitted that node centralization is one of ethereum‘s main challenges. In September 2023, he said that finding a perfect solution to address this problem could take another 20 years.
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