By
Julia Sakovich
May 3rd, 2024
The S&P Global Ratings report states that using institutional custodians for staking on Ethereum ETFs could exacerbate network concentration.
Trading spot Ethereum (ETH) exchange-traded funds (ETFs) could deepen the concentration risk on the network, according to a report from S&P Global Ratings. The report specified that spot ETH ETFs that allow for staking could be problematic in the long run.
How ETF Staking Can Deepen Centralization and Amplify Ethereum Concentration
The S&P report worries that the provision for staking on some spot ETH ETFs could worsen the network’s concentration problems because of the possibility that only a few major providers will control and centralize most of the staked tokens.
“US spot Ether ETFs that incorporate staking could become large enough to change validator concentrations in the Ethereum network, for better or worse…It is therefore critical to understand how ETF issuers’ choices will drive concentration risks,” noted analysts Andrew O’Neill and Alexandre Berry.
The analysts noted that spot ETH ETF issuers may not choose protocols like Lido for their staking needs. Currently, Lido is the largest validator on the Ethereum network, with a 31.7% control. However, the analysts believe that issuers would prefer an institutional crypto custodian for staking like Coinbase, currently the second largest on Ethereum, controlling 14.4%.
However, the report notes that the effect could vary depending on whether or not issuers decide to spread their stakes across numerous custodians. The analysts have pointed out that Coinbase is a custodian for 8 of the 11 spot Bitcoin (BTC) ETFs approved by the United States Securities and Exchange Commission (SEC). In addition, the major exchange platform is already a staking provider for three out of the four largest non-US ETH staking ETFs, according to the analysts. The hope is that new custodians will allow ETF issuers to spread their stakes to reduce the risk of centralization.
JPM Shares Concentration Concerns, Says May Deadline for Approval is Unlikely
JPMorgan has previously warned about the potential risk of centralization. Last year, the major bank cautioned that the Ethereum network has become a bit more centralized because of increased staking activity. JPMorgan analysts pointed out that while the five largest liquid staking providers control over half of all ETH staking, Lido alone controls nearly a third. This problem could worsen centralization risks because a concentrated number of node operators or liquidity providers could be targets of attacks or act as a single point of failure. The analysts also considered the possibility that these players could “collude to create an oligopoly that would promote their own interests at the expense of the interests of the community.”
JPMorgan is not optimistic about the chance of an SEC approval by May, the first deadline for approval. In a conversation with The Block, JPMorgan Managing Director Nikolaos Panigirtzoglou said an approval would require the SEC to categorize ETH as a commodity like Bitcoin, instead of a security. Unfortunately, Panigirtzoglou believes the chance that this will happen before May is less than 50%.
Nonetheless, ETH has enjoyed increased price activity as it recently crossed $3,000 for the first time in nearly two years. Although the price has corrected slightly to $2,995 as of writing time, the world’s second-largest cryptocurrency is still enjoying a rally from the possibility of a spot ETF and the upcoming Dencun upgrade.