Report Highlights Risks of Centralization in Ethereum Staking

• JPMorgan report confirms that the transition of Ethereum to the Proof-of-Stake (PoS) algorithm puts its decentralized nature at risk. 

• According to the report, three validators – Lido, Coinbase, and Binance control over 85 percent of liquid staking validation of the network. 

Ethereum (ETH) has this year launched two important major upgrades namely; the Merge, and the Shanghai Upgrade. The Merge was primarily focused on the transition of Ethereum from Proof of Work to the Proof of Stake consensus mechanism.

The Shanghai Upgrade on the other hand was designed to improve scalability, usability, and security. On top of that, it was designed to enable investors to unstake and withdraw the ETH previously locked up on the blockchain during the Merge upgrade.

Also, it was designed to reduce the ETH fee and improve network performance. While this has contributed to the massive growth of the entire Ethereum ecosystem, many believe that the network has switched from its original idea to become more centralized. This has been confirmed in the latest research reports published by JPMorgan (JPM).

Many in the crypto community had seen Lido, a decentralized liquid staking platform as a better alternative compared to the centralized liquid staking platforms associated with centralized exchanges.

According to the research report, Lido has put measures into place to contain the number of staked ETH controlled by any single node in order to address all issues of centralization. This was done by adding more node operators. 

The JPMorgan analysts led by Nikolaos Panigirtzoglou explained why centralization by any protocol or entity poses a risk to Ethereum.

A concentrated number of liquidity providers or node operators could act as a single point of failure become targets for attacks or collude to create an oligopoly that would promote their own interests at the expense of the interests of the community.

Ethereum Records Reduced Staking Yield

In addition to this, the rise of liquid staking creates another risk called rehypothecation. This comes into play when liquidity tokens are reused as collateral on several DeFi protocols. 

Rehypothecation could then result in a cascade of liquidations if a staked asset drops sharply in value or is hacked or slashed due to malicious attack or a protocol error. 

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The total staking yield is also reported to have reduced from 7.3 percent before the Shanghai Upgrade to 5.5 percent. 

It is important to note that Lido is Ethereum’s largest validator, and three times larger than Coinbase which is the next largest validator. Also, it is seven times larger than Binance. 

Prior to the Merge upgrade, some experts predicted that the transition to Proof of Stake could encourage centralization. According to Danny Ryan of the Ethereum Foundation, there is a corporation, centralization, and systemic threat. He admitted that Lido, Coinbase, and Binance are the three validators that now control more than 85 percent of the liquid staking validation of the network. 

This is contrary to the original idea as the Ethereum co-founder Vitalik Buterin believed that no liquid staking service would exceed 15 percent. 

Mohak Agarwal, the founder of ClayStack has also stated that the present challenge faced by Ethereum has nothing to do with where a stake is deposited. Instead, “who controls it.”

Ethereum is currently trading at $1,633.93 as of press time and is down by 1.9 percent in the last seven days. In the last 24 hours, the asset has fallen by 0.9 percent. 

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