The analysts stressed that centralization, whether caused by specific entities or inherent features of the protocol, presents significant risks to the Ethereum network. This
In recent months, the Ethereum (ETH) staking ecosystem has witnessed significant growth following the implementation of the Merge and Shanghai upgrades, transitioning the network from proof-of-work to proof-of-stake blockchain. However, this surge in staking activities has posed challenges, as revealed in a recent report by JPMorgan analysts led by Nikolaos Panigirtzoglou.
Decentralized Dilemma: Ethereum Staking Ecosystem Faces Centralization Risks
In September 2022, Ethereum made the bold transition from proof-of-work to an environmentally friendly proof-of-stake, a process named the Merge. This upgrade made the Ethereum network faster and cheaper to use, leading to a spike in staking. Nevertheless, a JPMorgan analyst disclosed that this growth has resulted in network centralization and a reduction in staking yield. The analysts, led by Nikolaos Panigirtzoglou, said:
“The rise in Ethereum staking since the Merge and Shanghai upgrades has come at a cost, as the Ethereum network became more centralized, leading to an overall decline in staking yield from 7.3% to 5.5%.”
According to the analysts, liquid staking providers, especially Lido, played a major role in this centralization. Despite being decentralized in theory, these providers exhibited high centralization in practice. JPMorgan’s analysis revealed that the top 5 liquid staking providers controlled over 50% of stakes on the ETH network. Lido alone accounted for almost one-third of the stakes. The staking platform has also had to add more node operators to make sure that the number of staked ethers being controlled by a single operator is controlled.
The analysts stressed that centralization, whether caused by specific entities or inherent features of the protocol, presents significant risks to the Ethereum network. This risk arises because when power becomes highly concentrated, particularly in the hands of major liquidity providers or node operators, it introduces vulnerabilities. These concentrated entities might become single points of failure, making the network susceptible to disruptions and potential attacks. Moreover, there’s a concern that they could collaborate to establish an oligopoly, prioritizing their own interests over the wider crypto community, which could involve censoring particular transactions or unfairly benefiting from end users’ transactions through front-running.
Ethereum Has Been Disappointing, According to JPMorgan Analysts
The analyst also said that Ethereum has not met expectations in terms of network activity. While the shift to proof-of-stake reduced Ethereum’s energy consumption significantly, the increase in network activity has been disappointing. Panigirtzoglou stated:
“While the energy consumption for the Ethereum network collapsed by more than 99%, the Ethereum supply is shrinking, and staking rose sharply (with the amount of ether staked up by 50% since the Shanghai upgrade), the increase in network activity has been rather disappointing.”
As the Ethereum community grapples with these challenges, it is crucial to address centralization risks and reevaluate the ecosystem’s structure. Decentralized platforms must balance fostering growth with ensuring network security and resilience. The industry closely monitors how Ethereum’s stakeholders respond to these concerns, as the future of the network’s decentralized finance world hangs in the balance.