Ethereum’s co-founder, Vitalik Buterin, has previously acknowledged that centralization stands as one of Ethereum’s primary challenges, a puzzle that may take up to two decades to unravel fully.
According to a recent report from JPMorgan, the surge in Ethereum staking following significant network upgrades, namely the Merge and Shanghai, has come at the cost of increased centralization and decreased staking returns. The report, authored by JPMorgan analysts led by the senior managing director Nikolaos Panigirtzoglou, was released on October 5, sounding a warning about the escalating centralization risks within the Ethereum ecosystem.
Intriguingly, the report highlights that the top five liquid staking providers, namely Lido, Coinbase, Figment, Binance, and Kraken, collectively control more than 50% of the staking activities on the Ethereum network. Notably, Lido alone accounts for nearly one-third of this share.
While the crypto community has often seen the decentralized liquid staking platform Lido as a preferable alternative to centralized counterparts such as Coinbase or Binance, the JPMorgan report contends that even decentralized liquid staking platforms exhibit a significant degree of centralization. The report emphasizes that a single Lido node operator holds sway over more than 7,000 validator sets or 230,000 Ether. These node operators are selected by Lido’s decentralized autonomous organization (DAO), which is controlled by a handful of wallet addresses, resulting in a relatively centralized decision-making process.
The report goes on to mention an incident where Lido’s DAO rejected a proposal to cap the staking share at 22% of Ethereum’s overall staking, a measure aimed at averting centralization.
As the JPMorgan analysts put it, “Lido didn’t partake in the initiatives, as its DAO resoundingly rejected the proposal with a staggering 99% majority.” They further stress that centralization, regardless of its source, poses significant risks to the Ethereum network, as a concentrated number of liquidity providers or node operators could potentially serve as a single point of failure, become vulnerable to attacks, or engage in collusion that might foster an oligopolistic environment.
Beyond the concerns of increased centralization, the post-Merge Ethereum landscape has also witnessed a decline in overall staking yields, as highlighted by JPMorgan. The standard block rewards have dwindled from 4.3% before the Shanghai upgrade to the current 3.5%, while the total staking yield has decreased from 7.3% before the Shanghai upgrade to approximately 5.5% at present.
Notably, JPMorgan analysts aren’t the sole observers of Ethereum to have recognized a substantial rise in network centralization following the Merge upgrade. Executed on September 15, 2022, the Merge has been viewed as a significant hurdle to Ethereum’s decentralization and a key factor contributing to diminishing yields.
In a statement made in September 2023, Ethereum co-founder Vitalik Buterin candidly acknowledged that addressing node centralization remains one of Ethereum’s primary challenges, suggesting that finding an ideal solution could be a protracted journey, possibly spanning another two decades.