JPMorgan Report Flags Growing Centralization and Falling Staking Returns in Ethereum Network
Summary:
A recent JPMorgan report warns of rising centralization and decreasing staking yields in the Ethereum network following significant updates, Merge and Shanghai. The research indicates more than 50% of Ethereum's staking is now controlled by the top five providers. It also highlights a decline in staking yield rates post-Merge. Ethereum co-founder Vitalik Buterin has acknowledged node centralization as a crucial challenge for the network.
Ethereum's surge in popularity for staking due to significant updates known as Merge and Shanghai, has resulted in increased centralization and decreased staking rewards, according to a research conducted by JPMorgan. The report, released on 5th of October and led by the senior managing director Nikolaos Panigirtzoglou, pointed out potential risks associated with Ethereum's escalating centralization.
JPMorgan's research indicated that more than half of Ethereum network's staking is controlled by the five major liquid staking providers, which include Lido, Coinbase, Figment, Binance and Kraken. They further revealed that nearly one-third of this is accounted for by Lido alone.
Despite the crypto community regarding Lido, the decentralized liquid staking platform, as a superior alternative compared to centralized platforms like Coinbase or Binance, it also has a significant degree of centralization. JPMorgan's study highlighted the fact that over 7,000 validator sets, or 230,000 ETH, are accounted for by a single Lido node operator.
Lido’s node operators are chosen by its decentralized autonomous organization (DAO), predominantly regulated by a small number of wallet addresses, resulting in centralization of decision-making on the platform. JPMorgan cited an instance where a proposal to restrict the staking share to 22% of Ethereum’s total staking to prevent centralization was overwhelmingly rejected by Lido’s DAO.
JPMorgan's report underlined that such centralization by any entity or protocol endangers the Ethereum network by creating a single point of failure, or making it susceptible to attacks or collusion.
In addition to the issue of centralization, JPMorgan found a decrease in overall staking reward rates following the Merge update. It was noted that standard block rewards have decreased from 4.3% before the Shanghai update to the current 3.5%, with the total staking reward dropping from the pre-Shanghai rate of 7.3% to the current 5.5%.
Other Ethereum observers have also expressed growing concerns regarding the increased centralization of the network following the Merge update, implemented on September 15, 2022. This trend has been seen as a major hurdle to Ethereum's decentralization and a primary cause for declining rewards.
Vitalik Buterin, co-founder of Ethereum, acknowledged that node centralization was one of the key challenges facing Ethereum. He stated in September 2023 that it may take another two decades to find an ideal solution to this issue.
Published At
10/6/2023 1:26:59 PM
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