The Block has cited a report from S&P Analysts, Andrew O’Neill and Alexandre Birry, pointing out that the introduction of Ethereum spot ETFs with “staking functions” could significantly change the concentration of Ethereum validators as the asset size grows.
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Introduction of staking in Ethereum ETFs: Could it lead to staking centralization?
S&P: Issuers are unlikely to choose Lido for staking
Is S&P overthinking?
Introduction of staking in Ethereum ETFs: Could it lead to staking centralization?
The analysts use Bitcoin ETFs as an example, where Coinbase serves as a custodian for 8 out of 11 Bitcoin ETF issuers. Currently, Coinbase is also designated as a staking institution for 4 Ethereum staking ETFs outside of the United States.
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The analysts state that only the emergence of new large custodians would allow ETF issuers to distribute ETH for staking among different institutions, thereby reducing the concentration risk (possibly referring to Coinbase’s staking market share). Issuers such as Ark Invest and Franklin Templeton have already been negotiating staking functionality with regulatory institutions in their application documents.
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S&P: Issuers are unlikely to choose Lido for staking
Lido, a liquidity staking protocol, is currently the largest Ethereum validator, followed by Coinbase. The S&P analysts believe that ETF issuers are unlikely to choose decentralized protocols like Lido and would instead opt for custodians. JPMorgan analysts have also recently warned about the concentration risk of Ethereum staking, stating that Lido, being the largest validator, could become a single point of failure, a target for attacks, or deliberately monopolize and strengthen the Lido protocol itself.
Is S&P overthinking?
However, according to Bitcoin Treasuries data, all Bitcoin ETF products collectively hold 876,000 BTC, which is only about 4.17% of the circulating Bitcoin supply. So, for Ethereum ETFs with lower attractiveness and trading volume, how much ETH would be locked in circulation? And would it significantly change Ethereum’s staking ecosystem and lead to centralization?
Perhaps instead of worrying about the increasing staking market share of institutions like Coinbase, it would be better to find a solution to address Lido’s dominant position. This has been a concern raised by Ethereum developers, and even Ethereum’s founder, Vitalik Buterin, suggesting limiting the dominance of a single validator entity through transaction fees and other means.
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Lido holds over 30% of the liquid staking market! Does Ethereum’s 22% validator limit really need to be enforced?
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Further reading
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