The Surge in Ethereum Staking Accompanied by Elevated Centralization Concerns, Warns JPMorgan

JPMorgan’s latest research report highlights the downsides of the increasing trend in Ethereum (ETH) staking post the Merge and Shanghai upgrades. The report notes a decline in the attractiveness of ether from a yield standpoint. Despite the rise in staking activities, the Ethereum network is grappling with higher centralization, posing potential risks.

Lido, recognized as a decentralized liquid staking platform, was initially seen as a preferable alternative to centralized counterparts tied to exchanges. JPMorgan underscores Lido’s efforts to mitigate centralization concerns by expanding its node operators. However, the bank emphasizes the inherent risks associated with centralization, as a concentrated number of node operators could act as vulnerabilities or collude, undermining the community’s interests.

The report delves into additional risks, such as rehypothecation, where liquidity tokens are reused across multiple decentralized finance (DeFi) protocols simultaneously. JPMorgan warns that this practice could trigger a chain of liquidations if a staked asset faces a significant value drop, a hacking incident, or a protocol error.

Furthermore, the surge in staking has diminished the appeal of ether, particularly in terms of yield, especially when compared to the rising yields in traditional financial assets. The total staking yield has witnessed a decline from 7.3% pre-Shanghai upgrade to approximately 5.5%, according to the report.