JPMorgan analysts have raised concerns about the risks related to the growing centralization of Ethereum after the transition to Proof-of-Stake. They believe the growing popularity of liquid staking protocols contributes to the decreasing decentralization of the blockchain network.
In a new note to investors, JPMorgan analysts have warned of the risks associated with the growing centralization of the Ethereum blockchain network. This is reported by CoinDesk.
According to the research group’s report, The Merge and Shanghai updates have led to a rise in the popularity of ETH staking, which makes the blockchain network more centralized. The report states that over 50% of ETH blocked for passive profit is controlled by the five largest liquid staking providers, namely Lido, Binance, Figment, Kraken, and Coinbase.
Almost a third of this share is held by the decentralized platform Lido, which is seen by the community as a more attractive alternative to centralized crypto exchanges. However, JPMorgan analysts note that Lido turns out to be very centralized in practice. All decisions within the project are made by voting in the DAO that is basically controlled by several wallets. The holders of the Lido DAO Token (LDO) are the ones who choose the operators for the staking nodes. As a result, more than 7,000 validator sets holding 230,000 ETH have come under the control of a single operator.
The Lido DAO has recently declined a proposal to implement a limit for Ethereum staking validators, with nearly 99% of the organization’s members voting against it.
The JPMorgan report states that the centralization of any Ethereum-based framework or protocol poses risks to the entire blockchain, as a concentrated number of liquidity providers or node operators reduces the network’s security. These same risks were earlier warned about by HashKey Capital analysts.
Moreover, JPMorgan analysts claim that the profitability of ETH staking started to plummet immediately after The Merge. For example, the total return after the Shanghai update fell from 7.3% to about 5.5%, while the block reward dropped from 4.3% to 3.5%. Earlier, the JPMorgan report has already recorded changes in network performance after the hard fork. In particular, there was a 50% increase in the number of staked ETH.
Vitalik Buterin, Co-Founder of Ethereum, doesn’t deny that centralization of nodes remains one of the major problems of the blockchain network and its solution requires adhering to the code minimalism and not overloading the consensus algorithm.
