JPMorgan Chase &. Co. has shed light on how the Ethereum network decentralization has decreased significantly since the Merge event and Shanghai upgrade went live.
The rise of staking and centralization
Since implementing the Merge and Shanghai upgrades, Ethereum has seen a substantial uptick in staking activities.
Staking, a process where users lock up their crypto assets to support network operations, has its merits. According to a CoinDesk report citing JPMorgan research, this surge in staking activity comes at a cost: centralization.
Traditionally, many in the crypto community prefer decentralized liquid staking platforms like Lido over their centralized counterparts.
Lido’s approach included adding more node operators to ensure no single entity controlled a significant portion of staked Ether (ETH). The aim was to address centralization concerns.
However, centralization remains a risk. A concentration of liquidity providers or node operators could act as a single point of failure or even collude to create an oligopoly, potentially undermining the interests of the broader Ethereum community.
Ethereum, the world’s second-largest crypto, has become more centralized since the Merge and Shanghai upgrades. And JPMorgan is highlighting concerns over a decline in staking yields.
The menace of rehypothecation
Another highlight from the report is rehypothecation. This complex term refers to the practice of reusing liquidity tokens as collateral across multiple decentralized finance (DeFi) protocols simultaneously.
DeFi encompasses lending, trading, and other financial activities carried out on the blockchain.
The problem arises when a staked asset’s value sharply declines or faces a security breach or protocol error.
In such scenarios, rehypothecation could trigger a cascade of liquidations, jeopardizing the stability of the DeFi ecosystem.
Furthermore, the report points out that the increase in staking has diminished the appeal of Ethereum from a yield perspective.
This shift is especially noticeable amid rising yields in traditional financial assets. The total staking yield has fallen from 7.3% before the Shanghai upgrade to approximately 5.5%.
From a different perspective, the research data presented in December following Ethereum’s Merge upgrade in September 2022 reveals a significant reduction in the network’s energy consumption, akin to the energy usage of entire countries such as Ireland and Austria.
This decrease in power consumption positively contributes to environmental sustainability, aligning with broader global efforts to reduce the carbon footprint associated with blockchain technologies.
Ethereum’s core developers have introduced an Ethereum Improvement Proposal (EIP-7514) as part of the upcoming Dencun upgrade, scheduled for activation in October 2023.
This proposal aims to slow down the rate of Ether staking. The intention is to provide the Ethereum community with more time to devise a practical reward scheme for stakers on the network.
ETH price analysis
As of the time of writing, the price of Ethereum (ETH) stands at $1,629, representing a 3.4% decline on the weekly timeframe.
Ethereum’s Relative Strength Index (RSI) is currently sitting at 40.4.
The price of ETH is struggling to maintain the $1600 level after facing rejection at the $1700 resistance level. A failure to hold the $1600 level could potentially lead to a further decline to the $1500 level.
Source : Crypto.news / October 08, 2023