Crypto experts warn that concerns over centralization could lead to “serious” security risks following the approval of Ethereum spot ETFs in the United States, particularly if staking were to be integrated.
Risks related to the centralization of Ethereum validators
Ethereum ETF issuers had to remove the customer ETH staking clause to facilitate the approval process. However, this decision could have long-term consequences for network security.
Since the move to proof of stake in September 2022, validators must lock up their ETH in a process called staking. They receive rewards for securing the network, but suffer penalties for poor performance.
Centralization issues have already emerged when some validators took control of a significant portion of the ETH staked, with some even comparing liquidity provider Lido to a “cartel.”
Ganesh Swami, CEO of Covalent, explain to Decrypt: “ Removing the pledging clause in ETH ETF authorization applications was a move intended to appease the SEC. But this short-term solution could cause a long-term problem. If multiple ETFs use the same custodians, this would increase concentration, exposing the network to operational risks such as malicious collusion. »
Lack of regulation and potential risks
Spot Bitcoin ETFs in the United States already illustrate the risk of centralization, with Coinbase holding 90% of total assets. Adding staking could make the situation worse. Andrew O'Neill of S&P Global points out that if ETFs concentrate their participation with a small number of custodians, this could create risks of concentration of crypto validators.
Coinbase, Ether's second-largest validator, is tipped to be the custodian for six of the nine companies planning to launch an Ethereum ETF. If the craze is similar to that of Bitcoin ETFs, this concentration of power could threaten the security of the network.
Mona El Isa of Avantgarde Finance explains: “ Concentration risk can be measured by the number of nodes a single entity would need to control the chain. The lower this number, the higher the central point of failure. »
The SEC considers staking to be a securities service, which explains its removal of Ethereum ETF applications. However, authorities have not established any guidelines to mitigate the risks of centralization and concentration without staking. The SEC has already sued Kraken and Coinbase to prevent them from offering staking services to US customers.
Crypto experts are therefore calling for increased vigilance regarding Ethereum ETFs to avoid major security risks. It is crucial that regulators and industry stakeholders work together to develop clear guidelines to reduce these potential risks and ensure the long-term security of the Ethereum network.
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