The risks associated with the concentration of Ethereum [ETH] have become more obvious, especially while waiting for the approval of spot ETFs in the United States.
Traditional finance (TradFi) has also expressed concern about this risk, referring to a zero-sum result if spot ETFs in the United States get the green light from the SEC.
Risk Analysis
In a February report, S&P Global identified staking of ETH, citing Lido [LDO] as one of the main concentration risks.
The report highlighted that “an increase in Ether staking ETFs could affect a mixture of validators participating in the Ethereum network’s consensus mechanism. The participation of institutional guardians could reduce the current concentration on the Lido decentralized staking platform
.”
However, the report also noted that such a move could “introduce new concentration risks, particularly if a single entity is chosen to stake the majority of ether in these ETFs.”
Buterin’s Solution
Speaking at ETH Taipei, Ethereum co-founder Vitalik Buterin mentioned a new “rainbow staking” proposal — a plan to improve staking diversity by using less than 32 ETH along with a less overwhelming node operation.
Buterin delved into the concept of rainbow staking, stating: “the idea here is that they are explicitly divided into two types of staking, and you call them heavy staking and light staking.”
However, he recognized the challenge of such a proposal; “The lower part of 32 ETH is more challenging and fundamentally because originally 32 ETH was a compromise between not requiring too much ETH to be a staker and not having too many stakers because that would have made the blocks too difficult to process.”
Implementation and the Current Scenario
The rainbow staking proposal is in the testing phase and it will take longer before it becomes an official solution for the risk of staking concentration.
Meanwhile, some of the major ETH holders who manage validator nodes, such as Coinbase, have welcomed calls for a greater diversity of Ethereum execution customers and have moved to NetherminDeth. However, the Geth execution client still has a supermajority at 66%
.
Meanwhile, the Ethereum Foundation is under investigation by the SEC, which could affect spot ETH ETFs. However, it is not yet specified whether concentration risks are part of the investigation.