The report said that the increase in staking reduces the attractiveness of Ether from a yield perspective.
JPMorgan Chase (JPM) said in a research note on Thursday that the increase in Ethereum (ETH) staking since the Merge and Shanghai upgrades has come at a cost to Ethereum as the network has become more centralized and overall staking yields have fallen.
“Many in the crypto community believe that decentralized liquidity staking platforms like Lido are a better alternative to centralized liquidity staking platforms associated with centralized exchanges,” analysts led by Nikolaos Panigirtzoglou wrote.
The Wall Street bank noted that Lido has been adding more node operators to control the amount of staked ether controlled by any single operator in an effort to address centralization concerns.
Still, centralization of any entity or protocol poses risks to Ethereum, as “a concentrated number of liquidity providers or node operators could become a single point of failure, or become a target of attack, or collude to create an oligopoly to promote their own interests at the expense of the community,” the report added.
Another risk posed by increased liquidity staking is rehypothecation, the bank said. This is when liquidity tokens are reused as collateral across numerous decentralized finance (DeFi) protocols simultaneously. DeFi is an umbrella term for lending, trading and other financial activities conducted on blockchains.
“If the value of the pledged assets drops significantly, or if they are hacked or slashed due to malicious attacks or protocol bugs, rehypothecation could result in a cascade of liquidations,” the report said.
The report added that the increase in staking also reduced the attractiveness of ether from a "yield perspective," especially given the backdrop of rising yields on traditional financial assets. The total staking yield fell from 7.3% before the Shanghai upgrade to around 5.5%.