JPMorgan has raised concerns over the increased centralization of Ethereum following its transition to a proof of stake (PoS) model, known as the Merge, completed in September 2022, and the subsequent Shanghai upgrade in April. The shift from miners to validators significantly reduced Ethereum's energy use but saw more Ether held by centralized entities.
One such entity, Lido Finance, now controls approximately 32.19% of all staked ETH. This concentration has raised concerns about potential single points of failure or oligopolies, which could jeopardize community interests and favor centralized exchanges over DeFi protocols. Even with Lido incorporating more node operators to combat this centralization on liquid staking platforms, risks remain.
JPMorgan also highlighted the dangers of rehypothecation in liquid staking. This practice involves the reuse of liquidity tokens across multiple DeFi protocols and can trigger cascading liquidations if a staked asset significantly devalues, is slashed due to a malicious attack or protocol error.
The bank's research also pointed out the disappointing performance of Ethereum post-Shanghai upgrade, marked by steep declines in daily transactions, active addresses, and DeFi Total Value Locked (TVL). The total staking yield dropped from 7.3% pre-Shanghai upgrade to approximately 5.5%. Amid rising yields in traditional financial assets, this decrease has diminished Ethereum's attractiveness from a yield perspective.
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