In a recent report by JPMorgan (NYSE:JPM), Ethereum's centralization has been noted to have increased following the Merge update and Shanghai merger, which took place earlier this year. The report, published on Friday, also highlighted a decline in staking returns from 7.3% pre-Shanghai upgrade to around 5.5%.
The report identified five major providers - Lido, Coinbase (NASDAQ:COIN), Figment, Binance, and Kraken - as controlling over half of Ethereum's staking. Lido's contribution is particularly significant, controlling almost one-third of the total staked Ether. This situation has inadvertently amplified centralization in the Ethereum network, posing a risk of a single point of failure due to concentrated liquidity providers and node operators.
On Lido's platform, one node operator selected by Lido’s DAO (governed by a few wallet addresses) controls over 230,000 ETH or more than 7,000 validator sets. A proposal to cap the staking share at 22% was overwhelmingly rejected by Lido’s DAO.
The report further scrutinizes the growing issue of rehypothecation risks in interconnected DeFi protocols that could trigger a chain reaction of liquidations if an asset's value drastically drops or in case of cyberattacks or protocol malfunctions.
Vitalik Buterin, Ethereum's co-founder, has recognized node centralization as a significant issue for Ethereum. In addition to these concerns, the report also points out that with the total staking yield dropping from 7.3% to 5.5%, Ethereum's appeal is diminishing against traditional assets.
Despite its pioneering role in decentralized applications and smart contracts, these developments present significant obstacles in Ethereum's path toward mainstream adoption. The declining staking returns and increasing centralization are jeopardizing Ethereum's decentralization ethos and may pose a threat to its future growth.
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