JPMorgan warns of Ethereum centralization risks after Merge upgrade

- The Ethereum Merge ushered in a new era for the top-ranked smart contract platform as it enabled investors to withdraw staked Ether for the first time, increasing the network’s value proposition, but it has also resulted in a greater degree of centralization, according to a new report from JPMorgan.

At the heart of the matter is liquid staking, a process where token holders can stake their coins to earn rewards while also accessing the value held in those assets via a staked token representative, such as stETH, which represents and tracks the value of the underlying staked asset. However, the analysts warned that, in practice, “even decentralized liquid staking platforms involve a high degree of centralization,” as a single Lido node operator accounts for more than 7,000 validator sets worth approximately 230,000 Ether.

“Lido didn't participate in the initiatives as its DAO rejected the proposal by an overwhelming majority of 99%,” the analysts said. “Needless to say that centralization by any entity or protocol creates risks to the Ethereum network as 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, e.g.

The analysts likened liquid staking to the practice of rehypothecation as it involves using liquidity tokens as collateral across multiple DeFi protocols simultaneously. “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 said.

Some analysts have attributed the disappointing stats to a lack of demand from institutions, while others have pointed to the deteriorating macroeconomic environment.

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