The rapid increase in ether (ETH) staking following the introduction of the Merge and Shanghai updates had unexpected consequences for the Ethereum network. As indicated in the latest JPMorgan report, with the increase in staking participation, the network became more centralized, reducing its overall profit from this process.
The Merge and Shanghai updates aimed to bring benefits to Ethereum, but they also brought certain challenges. A key observed phenomenon was the increase in ether staking, leading to greater network centralization.
Some crypto enthusiasts saw Lido, a decentralized liquid staking platform, as an attractive alternative compared to centralized platforms associated with exchanges. Lido made efforts, adding more node operators to reduce the amount of ether controlled by a single operator. This aimed to address the centralization issue.
Nevertheless, excessive centralization, regardless of the entity or protocol, poses a risk to Ethereum. There’s a concern that a concentrated number of liquidity providers or node operators could become a single point of failure. They could also become targets for attacks or collude, forming an oligopoly promoting their own interests at the community’s expense.
Another threat associated with the increase in liquid staking is rehypothecation. This means reusing liquidity tokens as collateral in multiple decentralized finance (DeFi) protocols simultaneously. DeFi is a term encompassing financial activity carried out on the blockchain, such as loans or trading. Rehypothecation could lead to a collateral avalanche if the pledged asset were to rapidly lose value or be hacked due to an attack or protocol error.
Therefore, the increase in staking in Ethereum has reduced the attractiveness of ether from a profit standpoint. In the context of rising returns on traditional financial assets, the total profit from staking dropped from 7.3% before the Shanghai update to about 5.5%.
In light of the above information, cryptocurrency investors and enthusiasts need to carefully consider the pros and cons of staking in Ethereum, paying attention to the potential risk associated with network centralization.
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