Ethereum’s recent surge in ether (ETH) staking, driven by the Merge and Shanghai upgrades, has sparked worries about centralization and reduced staking yields, according to a JPMorgan report. The increasing centralization of Ethereum, despite decentralized alternatives like Lido’s liquid staking platform, poses risks to the network’s security and decentralization ethos.
The crypto community has often regarded Lido, a decentralized liquid staking platform, as a better alternative to centralized liquid staking platforms affiliated with centralized exchanges. However, the report highlights the dangers associated with centralization. These risks include the potential for a few liquidity providers or node operators to act as single points of failure, vulnerable targets for attacks, or collaborators forming detrimental oligopolies within the community.
Rehypothecation Risk
The rise of liquid staking has introduced the risk of rehypothecation. Reusing liquidity tokens as collateral across multiple decentralized finance (DeFi) protocols simultaneously can lead to a cascade of liquidations if a staked asset’s value drops sharply or if it falls victim to hacking, slashing, or protocol errors.
Furthermore, the report notes that increased staking activity has diminished the attractiveness of ether from a yield perspective, especially when compared to rising yields in traditional financial assets. The total staking yield for Ethereum has declined from 7.3% before the Shanghai upgrade to approximately 5.5%, reflecting the evolving landscape of crypto investments amidst changing market dynamics.
Accessibility Challenges
Although staking is technically open to everyone, individuals must hold 32 ETH ($52,000) to set up a staking node and participate in staking from scratch. Users with fewer holdings must rely on centralized staking providers, which alleviate the financial and technical burdens on their shoulders in exchange for a share of their profits. Currently, Lido is the largest among such providers, controlling 8.9 million ETH out of the total 30.7 million ETH locked in the network’s staking contract.
Ethereum’s rising staking centralization has become a cause for concern within the crypto community. While decentralized alternatives like Lido’s liquid staking platform exist, the inherent risks of centralization, including the concentration of power and the potential for manipulative practices, cannot be ignored. Additionally, the introduction of rehypothecation poses another level of risk to stakeholders. Moreover, the diminishing yield attractiveness of ether compared to traditional financial assets further raises questions about the long-term viability of staking as a profitable investment strategy. As Ethereum continues to evolve, addressing these concerns and finding solutions that promote decentralization and safeguard investors’ interests will be crucial for the network’s sustainability and growth.
