JPMorgan analysts warn Ethereum staking threatens network decentralization

The bank’s analysts warn that Ethereum’s staking growth has led to more centralization of the network and a decline in yield.

Ethereum's staking growth has sparked greater centralization of the network and a decline in yield, as noted by JPMorgan.

According to the analysis, the recent surge in Ethereum staking resulting from the "The Merge" and "Shanghai" upgrades has come at the cost of a more centralized network and an overall decrease in staking yield. The migration of the network from proof-of-work to proof-of-stake through the September 2022 Merge upgrade has enabled staking. The April upgrade in Shanghai permitted validators to withdraw and reinvest staked ether that had been locked in the network, causing a surge in staking.

Major contributors to this growth are liquid staking providers, including Lido. However, the top five liquid staking providers dominate more than 50% of the staking on the Ethereum network, with Lido being responsible for almost one-third. Even though they are decentralized liquid staking platforms, they exhibit a high degree of centralization.

This centralization poses risks for the Ethereum network as it may potentially become a single point of failure or a target for attacks. Moreover, it could lead to an oligopoly that prioritizes their own interests over the community's.

Another issue to consider is the practice of rehypothecation, which involves utilizing liquidity tokens as collateral across multiple DeFi protocols simultaneously. This could trigger a series of liquidations if a staked asset drastically decreases in value or is compromised by a malicious attack or protocol error.

Moreover, Ethereum's staking expansion has resulted in decreasing rewards in comparison to rising yields presented by conventional financial assets. The total staking yield has dropped from 7.3% prior to the Shanghai upgrade to approximately 5.5% at present.