2023-10-06 21:11:28
Ethereum has become less decentralized after rising demand for staking, says JPMorgan
Blockmarket – The network, widely recognized for its decentralization and innovative scalability, may face an unexpected challenge. According to a recent report from JPMorgan (NYSE:), the network has become considerably more centralized following a significant increase in demand for staking.
Rising interest in staking
In September 2022, Ethereum underwent a significant update, “The Merge”, which marked the network’s transition from Proof of Work to Proof of Stake. This change allowed users to stake their Ether’s, leaving them locked in the network in exchange for profitability. The subsequent Shanghai-Capella update in April allowed the reinvestment of tokens, resulting in a significant increase in demand for staking.
The upward trend in demand for staking began to become evident in August this yearwhen we have already observed clear signs of a growing interest in staking, proven with data discussed by me in this analysis.
The side effect of PoS and Staking Liquido
According to JPMorgan analysts, led by Nikolaos Panigirtzoglou, the PoS consensus mechanism has an almost inevitable side effect: the increasing centralization of the asset. On the Ethereum network, data from Dune Analytics confirms that The main contributors to the growth of staking are net staking providers, which allows users to continue having the ability to move their allocated tokens, like the Lido protocol. As a direct consequence of this advantage, Lido controls around 30% of staked Ethereum. Furthermore, 50% of these Ethereums are concentrated among the top five liquid staking providers.
Fonte: “ Stakers Ordered by Amount Staked”
In addition to centralization, JPMorgan pointed out an additional risk linked to the growth of net staking: the practice of rehipoteca. Simply put, this practice involves using liquidity tokens as collateral across multiple decentralized finance (DeFi) protocols simultaneously. If, for some reason, the value of this collateralized asset drops drastically, is compromised by an attack, or faces penalties due to system failures, we would face a domino effect of liquidations, which would affect other assets besides the one in question.
The problem of centralization
Centralization, in any decentralized network, is a concern. Geographically close liquidity providers or stakers make the network vulnerable as they represent a large part of the network in a single location. They can become targets for attacks. Furthermore, such a group can come together and manage to unite a significant portion of the governance power of a network, thus being able to promote their own interests to the detriment of the community.
In summary, while Ethereum continues to be one of the leading blockchain networks, recent developments around staking have raised questions about its decentralization. As the network evolves, it will be crucial to address these concerns to ensure its long-term integrity and reliability.
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