Navigating Ethereum’s Staking Landscape

11.30.2023

Wave Leadership Thoughts  

Ethereum Staking: Is Crypto’s Golden Child Becoming Too Centralized?

By Shant Ganoumian, DeFi Analyst

It’s been just over one year since Ethereum, crypto’s biggest DeFi blockchain, fully transitioned from a Proof of Work (PoW) to a Proof of Stake (PoS) consensus mechanism. While the concept of staking promises to enhance security, scalability, and energy efficiency, concerns about centralization have cast a shadow over its landscape. At its core, Ethereum staking involves participants locking up a certain amount of Ether in a validator node, contributing to the validation of transactions and the creation of new blocks. In return, validators are rewarded with additional ETH. The decentralization ethos that underpins blockchain technology is fundamental to Ethereum’s success, yet the current infrastructure and trajectory of staking mechanisms prompts a critical examination.

It is evident that demand for staking is high, as over 33 million ETH (~27% of circulating supply) has already been staked. One of the primary concerns is the rise of a handful of prominent centralized exchanges and staking-as-a-service (SaaS) providers who collectively control a substantial portion of it. A breakdown of the largest stakers shown below reveals a concentration of influence between Lido and Coinbase, followed by Kraken and Binance as of November 29th, 2023. 

The pressing question emerges: Why does this concentration matter? The Ethereum community fears the centralization risks associated with decision-making on network upgrades, increased potential for collusion, and a higher susceptibility to targeted attacks on the network among others. Over the past seven days alone, over 200,000 ETH has been staked through Lido. This has contributed to their growing dominance, amplifying concerns about controlling a significant portion of the Ethereum network.

Balancing the benefits of staking efficiency with the imperative of preserving decentralization becomes paramount as Ethereum’s staking landscape evolves. Community collaboration, ongoing research, and innovative solutions are crucial in navigating the challenges posed by the concentration of staking power, ensuring the continued success and resilience of Ethereum’s decentralized ecosystem.

Latest News:

WELCOME FRIENDS: Hundreds of institutions and prominent individuals have invested directly in crypto, adopted the value thesis, or started building technology to support digital assets since Wave started tracking these developments in late 2020. Now the rise of the Metaverse, Decentralized Finance (DeFi), Non-Fungible Tokens (NFTs), and Decentralized Autonomous Organizations (DAOs) is driving mainstream adoption of blockchain technologies everywhere we look. We’re continuing to keep track of it every week here:

• KPMG’s Canadian unit is joining forces with blockchain data platform Chainalysis to assist companies in battling crypto fraud. As part of the collaboration, KPMG will join Chainalysis’ “Solution Provider” program. The program provides “rigorous monitoring, support, governance and risk management to crypto exchanges, financial institutions, law enforcement and government agencies.”
• China Asset Management’s Hong Kong branch has entered into a memorandum of understanding with Hashkey exchange and HamsaTech Hong Kong. The collaboration aims to jointly foster and develop Web 3.0 initiatives within the asset management sector in Hong Kong.
• Crypto hedge fund Nine Blocks Capital Management has become the first cryptocurrency hedge fund to receive a license from Dubai’s Virtual Assets Regulatory Authority (VARA).

REGULATORY ROUNDUP: We’re living through the era of regulatory recognition of digital assets. The legislation, litigation, and regulation happening today will dictate the entire future of our industry, and we have a historic chance to shape those changes by staying informed and providing public commentary.

• Grayscale Investments recently met with the Securities and Exchange Commission as it continues to seek approval for its application to convert its Grayscale Bitcoin Trust into a spot bitcoin exchange-traded fund. The asset manager met with officials from the SEC’s division of trading and markets last week to discuss potential listing matters concerning the shares of the product.
• The SEC filed charges against the cryptocurrency exchange Kraken, accusing it of operating an unregistered securities exchange, broker, dealer, and clearing agency. Furthermore, the SEC said that Kraken commingled customer and corporate funds, including by paying operational costs from accounts that held user funds. Kraken denied the allegations and vowed to fight the lawsuit.
• Binance founder and former CEO Changpeng “CZ” Zhao was released from custody last week on a $175 million personal recognizance bond. Zhao pleaded guilty to violating the Bank Secrecy Act in court, after federal officials alleged he directed Binance to allow U.S. customers to use the platform without conducting proper know-your-customer or anti-money laundering checks.

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