JPMorgan Report: Ethereum’s Centralization Increased Post Merge and Shanghai Upgrades

Ethereum’s recent surge in ether (ETH) staking, spurred by the Merge and Shanghai upgrades, has raised concerns surrounding centralization and reduced overall staking yields, according to a Thursday report by JPMorgan.

Despite decentralized alternatives like Lido’s liquid staking platform, Ethereum’s increasing centralization poses risks to the network’s security and decentralization ethos.

“Many in the crypto community had seen Lido, a decentralized liquid staking platform as a better alternative compared to the centralized liquid staking platforms associated with centralized exchanges,” wrote analysts led by Nikolaos Panigirtzoglou.

Lido has individually made efforts to decentralize by dividing its staked ETH among multiple node operators.

However, the report underscored the risks associated with centralization, including the potential for a small number of liquidity providers or node operators acting as single points of failure, vulnerable targets for attacks, or collaborators forming oligopolies detrimental to the community.

The rise of liquid staking has also introduced the risk of rehypothecation, where liquidity tokens are reused as collateral across multiple decentralized finance (DeFi) protocols simultaneously.

“Rehypothecation could then result in a cascade of liquidations if a staked asset drops sharply in value or is hacked or slashed due to malicious attack or a protocol error,” the note said.

Moreover, the report noted that the increased staking activity has diminished the attractiveness of ether from a yield perspective, particularly when compared to rising yields in traditional financial assets.  

Ethereum’s Real Yield

Ethereum’s total staking yield has declined from 7.3% before the Shanghai upgrade to approximately 5.5%, reflecting the changing landscape of crypto investments amid evolving market dynamics.

According to YCharts, the yield rate for 2-year US treasuries has risen to over 5%, in line with rising interest rates at large.

Though staking is technically accessible to anyone, one must hold 32 ETH ($52,000) to set up a staking node and enter the staking arena from scratch. Users with fewer holdings must access ETH staking through a centralized staking provider that takes the financial and technical burden off of their user’s shoulders in exchange for a cut of their profits.

Lido is currently the largest of such providers, controlling 8.9 million ETH of the total 30.7 million ETH locked in the network’s staking contract.

Another set of centralized firms including Coinbase, Kraken, and Binance collectively control over 5 million staked ETH, according to Glassnode.