Following altcoin Ethereum’s major network upgrades, Merge and Shanghai, the Ethereum staking landscape has undergone a significant transformation. But this transformation has come at a cost, as a new report by JPMorgan highlights growing concerns about increased centralization and declining staking returns. Here are the details…
JPM talked about altcoin ETH
JPMorgan analysts, led by senior managing director Nikolaos Panigirtzoglou, issued an investor note on Oct. 5, sounding a cautionary note about developing risks in Ethereum’s staking ecosystem. According to their findings, the centralization of Ethereum staking has increased significantly, raising concerns among the crypto community. One of the key findings in the report is the dominance of the top five liquid staking providers, including Lido, Coinbase, Figment, Binance and Kraken. These providers currently control over 50% of staking activity on the Ethereum network. Lido alone accounts for almost a third of this significant share.
While decentralized liquid staking platforms like Lido were initially perceived as alternatives to centralized exchanges like Coinbase and Binance, the JPMorgan report reveals that even these platforms exhibit a high degree of centralization. For example, a single Lido node operator is responsible for overseeing more than 7,000 validator sets, or 230,000 Ether. The issue of centralization emerges when examining Lido’s decentralized autonomous organization (DAO), which is controlled by a handful of wallet addresses. This concentration of power means that Lido’s decision-making processes are relatively centralized, as evidenced by its rejection of the DAO’s proposal to limit its staking share to 22% of Ethereum’s total staking share.
Centralization problem
JPMorgan analysts warn that centralization, whether by an organization or a protocol, poses a significant risk to the Ethereum network. Multiple liquidity providers or node operators can become a single point of failure or potential target for malicious activity, raising concerns about the security and resilience of the network. Apart from increasing centralization, Ethereum’s post-Merge landscape has also witnessed a decline in staking returns. Standard block rewards have decreased from 4.3% before the Shanghai upgrade to the current 3.5%. The total staking return followed a similar trend, falling from 7.3% before Shanghai to approximately 5.5% today.
It is important to note that JPMorgan analysts were not the only ones to observe this significant increase in network centralization following the Merge upgrade, which took place on September 15, 2022. Ethereum co-founder Vitalik Buterin also acknowledged the node centralization issue as a major issue facing Ethereum. He highlighted the complexities involved in maintaining a truly decentralized network, suggesting that it could take another 20 years to find a perfect solution to this problem.
Market warnings also arrived
On the other hand, Marko Kolanovic, Global Market Strategist and Co-Head of Global Research at JPMorgan, participated in CNBC’s “Fast Money” program and talked about his views on the stock market, the FED’s stance on interest rates, and the performance of mega-cap stocks compared to mid-cap stocks. Discussed a range of topics including: Kolanovic started his speech by stating that his perspective on the stock market was a bit negative. While He didn’t explicitly say a recession was inevitable, he did say he thought one would happen “eventually.” He also noted that the upside and downside in stocks isn’t particularly favorable right now.
Kolanovic said the job market is strong but highlighted signs of stress in the consumer sector, such as rising defaults on credit cards and auto loans. While he didn’t specifically say consumer sentiment was eroding, he suggested these could be early indicators of economic difficulties. Kolanovic discussed the current level of interest rates, specifically the 4.7% yield on the ten-year Treasury. He stated that these rates are not compatible with historical market coefficients and mentioned that they may rise a little more. However, he expressed no overt concern about current rate levels.
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