JPMorgan Releases an Evaluation Report on Ethereum: Is the Situation Bad?

• The Merge update conducted in 2022 transformed Ethereum from a proof-of-stake network into a proof-of-stake blockchain, enabling staking.
• Analysts noted that platforms like Lido, despite being decentralized liquidity providers, involve a “high degree of centralization.”
• Another concern stemming from centralization is the practice of “rehypothecation,” where liquidity tokens are used as collateral across multiple DeFi protocols simultaneously.

JPMorgan drew attention to striking issues in its latest evaluation report about Ethereum: The power of Lido leads to centralization!

JPMorgan Highlights Key Points in its Evaluation Report on Ethereum

According to JPMorgan, the recent growth in Ethereum staking has led to increased centralization of the network and a decrease in staking rewards. JPMorgan analysts wrote in a note, “The increase in Ethereum staking since the Merge and Shanghai updates has come at a cost of the Ethereum network becoming more centralized and an overall reduction in staking rewards.”

The Merge update conducted in 2022 transformed Ethereum from a proof-of-stake network into a proof-of-stake blockchain, enabling staking. The Shanghai update in April of this year further boosted staking by allowing validators to withdraw and re-stake locked Ethereum.

The main contributors to the growth in staking are liquidity providers like Lido. JPMorgan analysts stated, “The top 5 liquidity providers control over 50% of staking on the Ethereum network, with Lido making up about a third of it.” Despite being decentralized liquidity providers, platforms like Lido involve a “high degree of centralization,” according to the analysts.

The analysts continued, “It goes without saying that centralization by any asset or protocol poses risks to the Ethereum network, as a concentration of liquidity providers or node operators can act as a single point of failure or become targets for attacks or create an oligarchy to promote their own interests against the community’s interests, for example, by censoring certain transactions or front-running end-user transactions.”

Another concern arising from centralization is the practice of “rehypothecation,” where liquidity tokens are used as collateral across multiple DeFi protocols simultaneously. Analysts noted that this practice could lead to a series of liquidations if the value of a staked asset rapidly declines or if it gets hacked or slashed due to malicious attacks or protocol errors.

Decreasing Staking Rewards for Ethereum

The growth in Ethereum staking has led to decreasing staking rewards compared to increasing returns on traditional financial assets. They said, “The total staking reward has dropped from around 7.3% before the Shanghai update to approximately 5.5% now.”

Last month, JPMorgan stated that Ethereum had failed to meet expectations in terms of network activity after the Shanghai update. At that time, they noted decreases in Ethereum’s daily transactions, daily active addresses, and the total value locked in decentralized finance protocols on the network.