JPMorgan Flags Centralization and Yield Risks in Booming Ethereum Staking

• Ethereum staking has gained popularity following major network upgrades.
• Liquid staking protocols like Lido now control over 30% of staked Ether, increasing diversity but also centralization risks.
• Concentration among dominant staking entities poses systemic risks and the potential for cronyism.

The surging popularity of Ethereum staking since major network upgrades has engendered trade-offs around centralization and declining yields, according to analysts at JPMorgan.

In a research note, the Wall Street Bank highlighted the rapid growth of liquid staking protocols like Lido, which now control over 30% of staked Ether. While adding diversity, Lido’s prominence still creates centralization risks.

Lido seen as double-edged sword for Ethereum

JPMorgan warned that concentration among a few dominant staking entities poses systemic risks of single points of failure. Additionally, outsized power could enable cronyism and self-serving actions that harm community interests.

The analysts also flagged the practice of reusing staked tokens as collateral across DeFi protocols. This rehypothecation could trigger liquidity crunches if assets drop sharply in value.

Meanwhile, the surge in Ethereum staking has reduced overall yields paid out to participants. With staked Ether supplies ballooning, yields have slipped from around 7% pre-upgrades to under 6% currently.

This diminishing return versus rising traditional yields could dent the appeal of Ethereum staking over time, especially among larger institutions used to richer payouts.

While staking allows Ethereum to cement itself as the dominant smart contract blockchain, JPMorgan cautions that the heightened risks and reduced incentives warrant close monitoring going forward.