Since the Merge and Shanghai updates on Ethereum’s network, there has been a steady rise in staking and JP Morgan predicts that it can cause centralization issues. Analysts at JP Morgan including senior managing director Nikolaos Panigirtzoglou warned in their latest investor note about Ethereum’s increasing centralization issues.
Staking platforms cause centralization
They observed that decentralized crypto staking platform Lido emerged as a popular platform to stake Ethereum over big crypto players like Binance and Coinbase. However the analysts highlighted that there are fears of centralization even on decentralized platforms like Lido. This is because a single Lido node operator accounts for more than 230,000 ETH or 7,000 validator sets.
As per JP Morgan, the five biggest staking platforms were Lido, Coinbase Figment, Binance and Kraken. Lido alone accounts for one third of the 50 per cent of the entire staked Ethereum on these platforms.
Lido’s centralization arises because these node operators are elected by Lido’s decentralized autonomous organization (DAO) which is controlled by a few wallet addresses. The analysts say that this aspect of Lido has made its decision making process very centralized. The investor note referenced an instance in which Lido’s DAO rejected a proposal to limit the staking share to 22% of Ethereum’s total staking in order to prevent centralization.
Lido didn’t participate in the initiatives as its DAO rejected the proposal by an overwhelming majority of 99%
They also said in their report that “centralization by any entity or protocol creates risks to the Ethereum network as a concentrated number of liquidity providers or node operators could act as a single point of failure or become targets for attacks or collude to create an oligopoly.”
JP Morgan further noted that post-Merge the overall staking yield for Ethereum has declined. The standard block reward is down to 3.5% from 4.5% after the Shanghai upgrade. This means that people do show confidence in the network given increased staking and low yield but the staking as per the note has also declined to 5.3% from 7.3% post Shanghai upgrade.
Developers are trying to address the centralization issue
In November 2022, a roadmap was updated for Ethereum by co-founder Vitalik Buterin. The plan is supposed address block verification, centralization and address censorship among other problems. Recently, at the Korea Blockchain week, Vitalik discussed centralization issues faced by Ethereum. He said that one of the major problem of Ethereum nodes is their reliance on centralized web service providers such as Amazon Web Services (AWS)
A recent report by HashKey Capital revealed that the liquid staking derivatives market had surged to $22 billion in total value locked in as of 2023. Even they agreed that although this growth is a good news for concerned stakers and tokenholders, concerns about Ethereum’s centralization keep rising. On June 15 at the Ethereum core developer consensus meeting, Michael Neuder, a researcher at Ethereum Foundation suggested a 64-fold increase in the minimum amount of staked Ether required to become a validator, raising the threshold from 32 ETH to 2048 ETH.