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The rise in ether (ETH) staking since the Merge and Shanghai upgrades has come at a cost to Ethereum as the network has become more centralized and the overall staking yield has fallen, JPMorgan (JPM) said in a research report on Thursday.

Many in the crypto community had seen Lido, a decentralized liquid staking platform as a better alternative compared to the centralized liquid staking platforms associated with centralized exchanges, analysts led by Nikolaos Panigirtzoglou wrote.

Lido has been adding more node operators to contain the number of staked ether being controlled by any single operator, to address centralization concerns, the Wall Street bank noted.

Still, centralization by any entity or protocol creates risks for Ethereum as a concentrated number of liquidity providers or node operators could act as a single point of failure or become targets for attacks or collude to create an oligopoly that would promote their own interests at the expense of the interests of the community, the report added.

An added risk from the rise of liquid staking is rehypothecation, the bank said. This is when liquidity tokens are reused as collateral across numerous decentralized finance (DeFi) protocols at the same time. DeFi is an umbrella term used for lending, trading and other financial activities carried out on a blockchain.

Rehypothecation could then result in a cascade of liquidations if a staked asset drops sharply in value or is hacked or slashed due to malicious attack or a protocol error, the note said.

The increase in staking has also reduced the appeal of ether from a yield perspective, especially given the backdrop of rising yields in traditional financial assets, the report added. The total staking yield has dropped from 7.3% before the Shanghai upgrade to about 5.5%.

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Ethereum Has Become More Centralized Since the Merge and Shanghai Upgrades: JPMorgan - CoinDesk