JPMorgan has issued a report highlighting the growing centralization risks associated with Ethereum‘s increasing staking activities following major network upgrades, Merge and Shanghai. The report raises concerns about the concentration of staking power and its impact on decentralization.

Centralization on the Rise

JPMorgan‘s report, led by senior managing director Nikolaos Panigirtzoglou, points out that the rise of Ethereum staking has resulted in higher centralization and lower staking yields. Notably, the report highlights that the top five liquid staking providers, including Lido, Coinbase, Figment, Binance, and Kraken, now collectively control more than 50% of the staking activities on the Ethereum network. Lido alone accounts for nearly one-third of this staking control.

Market share of top five liquid staking providers. Source: JPMorgan

Challenges with Liquid Staking Platforms

While decentralized liquid staking platforms like Lido have been seen as alternatives to centralized staking providers, the report notes that they still exhibit a significant degree of centralization. In particular, the report points out that a single Lido node operator is responsible for over 7,000 validator sets, representing 230,000 ETH. Furthermore, the decision-making process within Lido’s decentralized autonomous organization (DAO) is controlled by a few wallet addresses, potentially compromising decentralization.

you are the yield pic.twitter.com/ONJT6QmDch

— Pledditor (@Pledditor) October 5, 2023

Centralization within the Ethereum staking ecosystem carries various risks. Concentrated liquidity providers or node operators could become single points of failure, targets for attacks, or even collude to create an oligopoly, potentially undermining the network’s security and integrity.

Declining Staking Yields

In addition to centralization concerns, JPMorgan’s report highlights a decline in staking yields on Ethereum. Standard block rewards have decreased from 4.3% before the Shanghai upgrade to the current 3.5%. Overall staking yields have also dropped from 7.3% pre-Shanghai to approximately 5.5% presently.

Echoing Vitalik Buterin’s Concerns

JPMorgan’s observations regarding centralization align with concerns raised by Ethereum co-founder Vitalik Buterin. He has acknowledged that centralization is one of Ethereum’s main challenges, and addressing this issue may require up to 20 years to find a suitable solution.

As Ethereum’s staking activities grow, so do the concerns over centralization risks. The concentration of staking power and the impact on decentralization have become critical points of discussion, with implications for the network’s security and long-term viability.