Ethereum stock increase due to high centralization – JPMorgan
Apart from major network upgrades, integration and Shanghai, Ethereum's stock growth has come on the back of higher centralization and a lower share price, according to a new JPMorgan report.
Analysts at JPMorgan, led by senior managing director Nikolaos Panigirtzoglou, issued a new investor note on October 5, warning of the risks posed by Ethereum's growing centralization.
The top five liquid staking providers: Lido, Coinbase, Figment, Binance and Kraken, control over 50% of staking on the Ethereum network, JPMorgan analysts cited in the report Lido alone almost a third.
The analysts noted that the crypto community sees decentralized liquid staking platform Lido as a better alternative to centralized staking platforms associated with centralized exchanges such as Coinbase or Binance. However, in practice, “even decentralized liquidity platforms involve a high degree of centralization,” according to a JPMorgan report, with one Lido node operator holding more than 7,000 sets of proof, or 230,000 Ether (ETH).
These node operators are elected by Lido's Decentralized Autonomous Organization (DAO), which is controlled by a handful of wallet addresses, “making the Lido platform central to decision-making,” the analysts wrote. The report cites a case where the Lido DAO rejected a proposal to cap its stake at 22% of Ethereum's total stake to avoid centralization.
“Lido was not involved in the initiative as its DAO rejected the proposal by an overwhelming 99%,” JPMorgan analysts added.
“Needless to say, centralization by any entity or protocol poses a risk to the Ethereum network because a large number of liquidity providers or node operators can act as a single point of failure or be the target of attacks or collude to create an oligopoly. […]”
In addition to higher centralization, post-merger Ethereum is also associated with lower overall yields, JPMorgan said. Standard block rewards fell to 3.5% from 4.3% before the Shanghai reform, the analysts wrote. Total stock yields fell to 5.5% from 7.3% before the Shanghai reform, the report added.
Related: Time to ‘Pull the Brakes' on Ethereum and Spin to Bitcoin: K33 Report
JPMorgan analysts aren't the only Ethereum watchers to notice a significant increase in network centralization following the merger update. The merger, which took place on September 15, 2022, was seen as a major setback for Ethereum's decentralization and a major reason for dropping the product.
You are the product pic.twitter.com/ONJT6QmDch
— Pleditor (@Pleditor) October 5, 2023
Ethereum founder Vitalik Buterin admits that node centralization is one of Ethereum's main challenges. By September 2023, he said finding a perfect solution to this problem could take another 20 years.
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