The burgeoning staking of ether (ETH), chiefly attributed to the Merge and Shanghai upgrades in the Ethereum network, has given rise to concerns over centralization and dwindling staking yields, as stated in a recent report commissioned by JPMorgan. This surge, while seemingly beneficial on the surface, potentially detracts from the principle of decentralization and exacerbates the network’s security risks.
Despite the existence of decentralized options like Lido’s liquid staking platform, Ethereum’s growing centralization could pose certain security risks. Lido, a decentralized platform, has taken steps towards decentralization by spreading its staked ETH across several node operators. However, this report highlights concerns over the potential pitfalls tied with centralization. A minuscule group of node operators or liquidity providers could compromise the security of the network by forming oligopolies or presenting themselves as targets for hacking attacks.
Moreover, the blossoming of liquid staking has bred a new breed of risks: rehypothecation, a process where liquidity tokens are reused as collaterals across multiple decentralized finance (DeFi) protocols at the same time. A sharp depreciation in the value of a staked asset or a malicious attack on the network can trigger a cascade of liquidations, affecting the economy of the entire network.
Additionally, the report suggests that the increased staking activity has diminished the allure of ether from an investment standpoint, all the more when juxtaposed against the soaring yields in traditional financial markets. Ether’s total staking yield, which previously stood at 7.3%, has shrunk to around 5.5%. This trend underscores the evolving nature of crypto investments as the market continues to grow and change.
Staking, while ostensibly open to anyone, requires a considerable investment of 32 ETH, equivalent to $52,000, just to set up a staking node. Thus, those with fewer holdings are compelled to access ETH staking through centralized staking providers such as Lido – the largest of its kind holding 8.9 million ETH. Other centralized entities, such as Coinbase, Kraken, and Binance, collectively hold more than 5 million staked ETH, underlining a trend of increasing centralization in the network.