Understanding the Cost of Higher Centralization of Ethereum Staking

Centralization of Ethereum Staking

Since the major network upgrades Merge and Shanghai, Ethereum staking has been on the rise, however, this has come with a cost of higher centralization and lower staking yields, according to a new report by JPMorgan.

The analysts led by senior managing director Nikolaos Panigirtzoglou published an investor note on Oct. 5, warning of the risks associated with the increasing centralization of Ethereum. According to the report, the top five liquid staking providers, namely Lido, Coinbase, Figment, Binance and Kraken, control more than 50% of the staking on the Ethereum network. Lido alone holds almost one-third of the staking.

The crypto community has been viewing the decentralized liquid staking platform Lido as an alternative to the centralized staking platforms, associated with centralized exchanges such as Coinbase or Binance. However, according to JPMorgan’s report, “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, or 230,000 ETH.

Decentralization in Web 3.0

Lido’s decentralized autonomous organization (DAO) is responsible for selecting node operators, which makes the platform rather centralized in its decision making, according to analysts. This was exemplified when the DAO rejected a proposal to cap the staking share at 22% of Ethereum’s overall staking to prevent centralization. The proposal was shot down by an overwhelming majority of 99%, according to JPMorgan analysts.

The Merge upgrade, which was executed on September 15, 2022, has been seen as a major contributor to the increasing centralization of the Ethereum network, as well as a reason for the declining staking yields. Before the upgrade, the standard block rewards stood at 4.3%, whereas now it has decreased to 3.5%. Similarly, the total staking yield has dropped from 7.3% to around 5.5%.

JPMorgan analysts are not the only ones to have noticed the centralization of Web 3.0. Many have commented on the issue and have raised concerns about how it could affect the decentralization of the network and the staking yields.

Vitalik Buterin, co-founder of Ethereum, has acknowledged decentralization as one of the main challenges of Ethereum. In September 2023, he said that finding a perfect solution to this issue may take up to 20 years. Decentralization in Web 3.0 is a key factor, and it is important to understand how to get involved in Web 3.0, what the main features of Web 3.0 are, or how to get onto Web 3.0. Additionally, a DAO Web 3.0 can be used to upgrade from LG WebOS 2.0 to 3.0.