According to a new study report from JPMorgan (JPM), the increase in ether (ETH) staking following the Merge and Shanghai upgrades has cost Ethereum because the network has become more centralised and the overall staking reward has decreased.
“Many in the crypto community had seen Lido, a decentralised liquid staking platform, as a better alternative compared to the centralised liquid staking platforms associated with centralised exchanges,” analysts under the direction of Nikolaos Panigirtzoglou said.
To address concerns about centralization, Lido has been increasing the number of node operators, the Wall Street bank stated. This has helped to limit the amount of staked ether that is owned by any one operator.
Nevertheless, centralization by any organisation or protocol poses risks for Ethereum because a “concentrated number of liquidity providers or node operators could act as a single point of failure or become targets for attacks or collude to create an oligopoly that would promote their own interests at the expense of the interests of the community,” according to the report.
Rehypothecation has been identified by the bank as an additional risk resulting from the growth of liquid staking. This occurs when a number of concurrent decentralised finance (DeFi) protocols simultaneously use liquidity tokens as collateral.
DeFi is a general term for financial transactions conducted on a blockchain, including lending, trading, and other financial operations.
“Rehypothecation could then result in a cascade of liquidations if a staked asset drops sharply in value or is hacked or slashed due to malicious attack or a protocol error,” the note stated.
The paper said that the rise in staking has also lessened the appeal of ether from a “yield perspective,” particularly in light of the backdrop of rising yields in conventional financial assets. Before the Shanghai upgrade, the overall staking yield was 7.3%; it is now just about 5.5%.