JPMorgan Report Highlights Growing Centralization Risks in Ethereum Network

In a new report, JPMorgan has raised concerns over the increasing centralization of the Ethereum network, citing potential risks that could ultimately result in the network’s control by a select few, endangering its overall health and integrity.

The report underscores the emergence of a more centralized structure within Ethereum following recent network upgrades. According to JPMorgan, this development introduces substantial vulnerabilities that may pave the way for an oligopoly—where a small number of individuals or entities possess significant influence, potentially limiting outside competition and imposing their own interests.

JPMorgan further expounded on the matter, pointing out that an elevated concentration of liquidity providers or node operators could act as a single point of failure. Such entities could become susceptible to attacks, or in the worst-case scenario, may collude to establish an oligopoly that serves their interests at the expense of the broader Ethereum community.

These findings have raised concerns about the financial soundness of the Ethereum network, which underpins numerous decentralized applications, including non-fungible tokens (NFTs), and supports the world’s second-largest cryptocurrency, ether. Ethereum’s market capitalization currently stands at over $198 billion.

Of significant note is the assertion that this oligopoly might already be taking shape. The recent network upgrades have empowered five key liquid staking providers Lido, Coinbase, Figment, Binance, and Kraken, allowing them to gain substantial dominance within the Ethereum ecosystem. Collectively, these providers now account for 50% of the total ether staked on the network, with Lido alone representing approximately one-third of the entire staking activity, as per data presented by JPMorgan.

Liquid staking, a mechanism enabling users to earn rewards while staking crypto on a protocol, has contributed to this centralization trend. It also affords users the flexibility to use staked tokens as collateral for other purposes, thereby enhancing liquidity.

However, the increasing centralization comes at a cost. JPMorgan’s data reveals that Ethereum’s staking yield has notably declined. While Ethereum once offered a staking yield of 7.3%, it has since dropped to an overall yield of 5.5% due to the uptick in staking activity.

The findings in JPMorgan’s report highlight the pressing need for continued discussions on how to strike a balance between the decentralization that Ethereum originally envisioned and the increasing concentration of influence that threatens its ecosystem. As the network evolves, these issues will need to be carefully addressed to maintain Ethereum’s integrity and ensure its continued resilience in the face of centralization risks.

This could very well open the doors wide for other viable blockchain networks that promote decentralized and inclusion such as Cardano, Pecu Novus and Avalanche to gain market share, while bringing into question layer-2 blockchain networks built on Ethereum that may fall into the same boat such as VeChain, Ontology, ICON and Optimism.

Terry Jones
Digital Assets Desk