Ethereum’s centralization increased post-merger and Shanghai reforms.

Ethereum's recent surge in Ether (ETH) reserves, spurred by mergers and Shanghai reforms, has raised concerns around centralization and reduced overall stock yields, according to a JPMorgan report on Thursday.

Despite decentralized alternatives such as the Lido liquid staking platform, Ethereum's increasing centralization poses a risk to the network's security and decentralized system.

“Many in the crypto community saw Lido, a decentralized escrow platform, as a better alternative to the centralized escrow platforms associated with centralized exchanges,” wrote analysts led by Nikolaos Panigirtzoglou.

Lido strives to decentralize by sharing the individually held ETH with multiple node operators.

However, the report noted the risks associated with centralization, with a small number of liquidity providers or node operators acting as single points of failure, vulnerable targets for attacks, or potential co-conspirators creating oligopolies that harm society.

The increase in liquidity has also introduced the risk of rehypothecation, where liquid tokens are reused as collateral in multiple decentralized finance (DeFi) protocols simultaneously.

“Again, hypothetically, if a stored asset falls significantly in value or is hacked or devalued due to a malicious attack or protocol error, it will result in more liquidity,” the note said.

Additionally, the report notes that the increased stock movement has reduced Ether's attractiveness in terms of productivity, especially compared to the increased yields on traditional financial assets.

The real product of Ethereum

Ethereum's total share yield has fallen from 7.3% before the Shanghai reform to about 5.5%, reflecting the volatile nature of crypto investments amid market volatility.

According to YCharts, the yield on 2-year US Treasuries rose more than 5%, driven by higher interest rates.

While staking is technically accessible to anyone, one must hold 32 ETH ($52,000). Users with small holdings must acquire ETH shares through a centralized share provider that takes the financial and technical burden off the user's shoulders to cut their profits.

Lido is currently the largest of these providers, controlling 8.9 million ETH of the total 30.7 million ETH locked in the network's share contracts.

Another set of centralized organizations, including Coinbase, Kraken and Binance, control more than 5 million ETH, according to Glassnode.