JPMorgan Warns of Ethereum's Decentralization at Risk
JPMorgan warns of Ethereum's growing centralization risk post-Merge, as liquid staking providers control over 50% of staking.
According to JPMorgan, the growth of Ethereum's staking could jeopardize the decentralization of the ecosystem. This is because, after the Merge and the Shanghai update, the network would have become more centralized due to the new distribution of staking returns.
Specifically, Nikolaos Panigirtzoglou, whose words were reported by Coindesk and who leads the crypto analysis team at JPM, commented on the development of Ethereum following the Merge. In September 2022, Ethereum transitioned from a proof-of-work (PoW) network to a proof-of-stake (PoS) system. The Shanghai update, on the other hand, allowed validators to withdraw staked ETH.
The focus is on liquid staking providers, which contribute significantly to the growth of staking. Lido, in particular, along with four other providers, would control over 50% of the staking on the network. Although they are decentralized protocols, they would lead to a substantial increase in the network's centralization.
Ethereum Liquid Staking Providers (Source: Dune)
Centralization, in itself, poses risks to the ecosystem. A concentrated number of liquidity providers or node operators could become a target for malicious attacks or form an oligopoly. An oligopoly refers to a group of actors offering a disproportionate service to customers, leading to actions that might go against the community's interests.
Furthermore, the use of liquidity tokens redirected to other DeFi protocols as collateral creates a risk of a "cascade effect" if something goes wrong. This could be due to a series of liquidations following a sudden drop in the asset or a protocol error.
Additionally, the staking yield itself has been affected by the increasing yields offered by traditional financial assets, dropping from 7.3% before the Shanghai upgrade to the current 5.5%. Ethereum's daily transactions are a symptom of this, with daily active addresses and the TVL of DeFi protocols all experiencing a decline.