JPMorgan has reported that Ethereum’s recent upgrades, known as the Merge and Shanghai, have led to increased centralization in the network and a decline in overall staking yields. The research report highlights concerns about the concentration of control and rehypothecation risks associated with these developments.
Key points from the article:
- Centralization Concerns: According to JPMorgan, the rise in ETH staking since the Merge and Shanghai upgrades has made the Ethereum network more centralized. The report notes that many in the crypto community had considered decentralized liquid staking platforms like Lido to be a better alternative compared to centralized ones linked to exchanges.
- Lido’s Efforts: Lido, a decentralized liquid staking platform, has been working to address centralization concerns by adding more node operators. This approach aims to prevent a single entity from controlling a large portion of staked ETH.
- Risks of Centralization: The report emphasizes that centralization, whether by an entity or protocol, poses risks to Ethereum. A concentrated number of liquidity providers or node operators could potentially become a single point of failure, be susceptible to attacks, or create an oligopoly that prioritizes their interests over the community’s.
- Rehypothecation Risk: The increase in liquid staking also introduces the risk of rehypothecation, where liquidity tokens are reused as collateral across multiple decentralized finance (DeFi) protocols simultaneously. If a staked asset’s value drops sharply or is compromised due to an attack or protocol error, it could trigger a cascade of liquidations.
- Yield Perspective: The report points out that the rise in staking has reduced the attractiveness of Ether from a yield perspective, especially with traditional financial assets offering higher yields. The total staking yield has reportedly decreased from 7.3% before the Shanghai upgrade to approximately 5.5%.
The research highlights the trade-offs and potential challenges associated with network upgrades in the Ethereum ecosystem, including concerns related to centralization and the impact on yield for stakers. These issues underscore the ongoing evolution and debate within the Ethereum community as it seeks to balance scalability, security, and decentralization.