The Merge and Shanghai upgrades have led to increased centralization in Ethereum, according to a report by JPMorgan (JPM), raising concerns over the network’s decentralization principle.
In a report by JPMorgan on Thursday, the surge in ether (ETH) staking following the upgrades has made Ethereum more centralized, while also reducing the overall staking yield.
Analysts led by Nikolaos Panigirtzoglou found that many in the cryptocurrency community viewed Lido, a decentralized liquid staking platform, as a preferable alternative to centralized platforms linked to centralized exchanges.
JPMorgan’s report also highlighted that Lido has been increasing its node operators to mitigate the quantity of staked ether controlled by any single operator, in an effort to tackle centralization issues.
However, the study cautioned that centralization by any entity or protocol posed risks for Ethereum, 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.”
The bank also warned of a risk from the rise of liquid staking known as rehypothecation, which involves the repeated use of liquidity tokens as collateral across multiple decentralized finance (DeFi) protocols simultaneously.
This could trigger a cascade of liquidations if a staked asset significantly drops in value or becomes compromised due to a malicious attack or protocol error, the report added.
Furthermore, the report noted that the increase in staking has diminished the attractiveness of ether from a “yield perspective,” especially in the context of rising yields in traditional financial assets. The total staking yield has dropped from 7.3% before the Shanghai upgrade to about 5.5%.
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