Is Ethereum’s Staking Boom A Ticking Time Bomb? JPMorgan Weighs In
October 06 2023 - 2:00PM
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Ethereum (ETH), a forerunner in the decentralized finance (DeFi)
ecosystem, has seen a notable surge in its staking activities. This
staking boom has raised eyebrows among experts from JPMorgan
concerned over ETH’s increase in centralization and the
consequences that may arise. Ethereum, aiming to transition to a
proof-of-stake consensus mechanism, opened the floodgates for
staking. This meant holders could ‘stake’ or lock their tokens to
support network operations like block validation. However, while
this promises rewards for the stakers, JPMorgan analysts have
reported that there could be ripple effects. Related Reading:
Whales Abandon Ship? Ethereum’s Value In Jeopardy As Major Holders
Liquidate Ethereum Centralization Concerns Rise To The Surface
JPMorgan analysts, led by Nikolaos Panigirtzoglou, highlight the
inadvertent increase in Ethereum’s network centralization,
particularly post the Merge and Shanghai upgrades. The Ethereum
network became “more centralized as the overall staking yield
declined,” they noted. According to the analysts, what’s
leading to this centralization could be attributed to liquid
staking providers. Lido, a notable player, has been pinpointed for
its dominant role. The JPMorgan report noted: The top 5 liquid
staking providers control more than 50% of staking on the Ethereum
network, and Lido specifically accounts for almost one-third. The
analysts further disclosed while platforms such as Lido tote their
decentralized nature, the underlying reality appears different. The
analysts said these platforms “involve a high degree of
centralization.” According to the analysts, the ramifications of
such centralization can’t be understated. They mentioned that “a
concentrated number of liquidity providers or node operators” might
compromise the network’s integrity, leading to potential points of
failure, attacks, or even conspiracy, resulting in an “oligopoly.”
They further highlighted that such centralized entities could
censor or exploit user transactions, undermining the community’s
interests. The Rehypothecation Risk And Declining Rewards Another
dimension to the staking story is the looming threat of
‘rehypothecation.’ In simple terms, it’s the act of leveraging
staked assets as collateral across various DeFi platforms.
According to the JPMorgan’s analysts: Rehypothecation could then
result in a cascade of liquidations if a staked asset drops sharply
in value or is hacked or slashed due to a malicious attack or a
protocol error. Furthermore, as Ethereum continues its journey on
the staking path, the staking rewards seem to diminish. The report
indicated a drop in total staking yield from 7.3% before the
Shanghai upgrade to roughly 5.5% recently. Related Reading:
Ethereum Price At Risk of Sharp Decline Unless ETH Clears This
Heavy Resistance Regardless, Ethereum has shown a slight upward
trajectory of 1.5% in the past 24 hours, with a market price
currently sitting at $1,643 and a market cap of approximately $9
billion, at the time of writing. Featured image from Unsplash,
Chart from TradingView
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