ETFs
Ethereum ETFs, a step towards centralization!
10:34 p.m. ▪ 4 min reading ▪ by Fénelon L.
Crypto experts warn that centralization issues could lead to “serious” security risks following the approval of Ethereum spot ETFs in the US, especially if staking is integrated.
THE Ethereum ETF issuers had to remove the clause regarding staking customer ETH to facilitate the approval process. However, this decision could have long-term consequences for network security.
Since transition to proof of stake in September 2022, validators must lock their ETH in a process called staking. They receive rewards for securing the network but face penalties for poor performance.
Centralization issues have already arisen when some validators seized a significant portion of the ETH staked, with some even comparing liquidity provider Lido to a “cartel.”
Ganesh Swami, CEO of Covalent, explain to decipher: “The removal of the staking clause in ETH ETF authorization requests aimed to appease the SEC. But this short-term solution could pose 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 US already illustrate the risk of centralization, with Coinbase owning 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 cryptocurrency validators.
Coinbase, the second-largest Ether validator, is expected 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 networks.
Mona El Isa of Avantgarde Finance explains: “We can measure concentration risk by the number of nodes a single entity would need to control the chain. The lower this number, the higher the single point of failure.
The SEC considers staking to be a securities service, which explains its removal from 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 ETF 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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Fenelon L.
Passionate about Bitcoin, I like to explore the intricacies of blockchain and cryptos and I share my discoveries with the community. My dream is to live in a world where privacy and financial freedom are guaranteed for everyone, and I firmly believe that Bitcoin is the tool that can make this possible.
DISCLAIMER
The views, thoughts and opinions expressed in this article belong solely to the author and should not be considered investment advice. Do your own research before making any investment decisions.