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Glassnode – a blockchain data provider – and CoinMarketCap have released their July 2022 report covering on-chain data during the bear market. On the topic of staked ETH, the report noted that a majority of the supply has concentrated in the hands of four staking providers.
Highly Concentrated Staking
Per the report’s data, the amount of ETH staked on Ethereum’s beacon chain through Lido alone has already swelled to 4.137 million. That’s 31.8% of all staked ETH in existence.
Another 3.505 million ETH – 27% of supply – is staked across Coinbase, Kraken, and Binance, some of crypto’s largest exchanges.
“Lido uses a permissioned validator set meaning 58% of ETH staking is held by 4 arguably centralized entities,” explained Glassnode’s lead on-chain analyst “Checkmate” on Twitter.
Staking allows users to lock up their crypto for a period of time, and receive a block subsidy in return for validating the beacon chain. When the Merge upgrade takes place (scheduled for September), the beacon chain will bring proof of stake (POS) to Ethereum’s mainnet.
However, staking requires one entity to provide a minimum of 32 ETH – an expensive entry requirement for average users. As such, many firms offer staking services for Ethereum and other coins by pooling together assets from smaller holders. The firms then provide an APR return to users, similar to a lending platform.
Is This a Problem?
Some have noted that the concentration of stake with dedicated staking platforms presents centralization risks for the blockchain. If a coordinated party holds 51% of a POS chain’s stake, it could fork the blockchain to its will.
Granted, a closer look indicates that Lido isn’t a totally centralized entity. It distributes its collected stake across ten different staking companies – though it selects which companies to cooperate with.
Checkmate interpreted the data as bearish for Ethereum, concluding that its upcoming proof of stake transition is a “grave mistake.”
“It is about to give up its credible neutrality, and make itself susceptible to almost immediate capture,” he said.
Though mining pools under the proof of work consensus mechanism are also fairly concentrated, the analyst argued that the risks aren’t the same. While miners “can and do” switch pools instantly when they want, he calls staking pools “extremely sticky.”