JPMorgan on Ethereum's Centralization and Lower Yields After Upgrades

According to CoinDesk, J.P. Morgan has released a research report indicating that Ethereum’s network is becoming increasingly centralized, and its staking yield has diminished, following the Merge and Shanghai upgrades. The report, published on October 5, was led by analysts including Nikolaos Panigirtzoglou.

Nikolaos Panigirtzoglou holds the position of Managing Director at J.P. Morgan and operates out of London, focusing on Global Market Strategy that encompasses Alternatives and Digital Assets. He is the editor of the weekly report Flows & Liquidity, a cornerstone publication for J.P. Morgan.

The financial institution noted that Lido, a decentralized liquid staking platform, was initially seen by many in the crypto community as a superior alternative to centralized staking platforms tied to centralized exchanges. To mitigate centralization risks, Lido has been expanding its roster of node operators, aiming to prevent any single entity from controlling a large portion of staked ether.

However, the report emphasized that any form of centralization poses risks to Ethereum. A small group of liquidity providers or node operators could potentially become a single point of failure, be vulnerable to attacks, or even collude to form an oligopoly that serves their own interests over those of the broader community.

Per CoinDesk’s article, another concern raised by JPMorgan is the practice of rehypothecation in liquid staking. This involves the reuse of liquidity tokens as collateral in multiple decentralized finance (DeFi) protocols simultaneously. Such a practice could trigger a chain reaction of liquidations if the value of a staked asset were to plummet abruptly or if it were compromised due to a malicious attack or protocol error.

Finally, the report pointed out that the attractiveness of ether as an investment has waned from a yield standpoint. Specifically, the total staking yield has decreased from 7.3% prior to the Shanghai upgrade to approximately 5.5%, particularly when compared to rising yields in traditional financial markets.

As you may remember, on August 29, the U.S. Court of Appeals for the D.C. Circuit ruled that the Securities and Exchange Commission (SEC) must review Grayscale Investments’ application to convert its “Grayscale Bitcoin Trust” product to a spot Bitcoin ETF.

Last month, Panigirtzoglou and his colleagues wrote a report indicating that the SEC may soon have little option but to greenlight multiple applications for spot Bitcoin exchange-traded funds (ETFs).

According to an article published by CoinDesk on September 4, in a report published on September 1, J.P. Morganemphasized that the court saw no legitimate grounds for the SEC to approve futures-based Bitcoin ETFs while turning down spot-based ones. This is a pivotal point, as the SEC would have to reverse its prior approvals of futures-based Bitcoin ETFs to justify its denial of Grayscale’s proposal to convert GBTC into a spot ETF. J.P. Morgan suggests that such a reversal would be both highly disruptive and detrimental to the SEC’s credibility, making it an improbable action.

On the other hand, J.P. Morgan also noted that even though Grayscale’s legal win could make the greenlighting of a spot Bitcoin ETF more plausible, it may not be a game-changer for the crypto market. Spot Bitcoin ETFs have been accessible in Canada and Europe for some time but have not attracted substantial investor attention. Furthermore, Bitcoin funds, whether they are futures-based or physically backed, have experienced limited investor participation since the second quarter of 2021. The bank’s analysts also contend that the advantages of spot Bitcoin ETFs over futures-based ones are relatively insignificant.

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