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Ethereum ETF Approval May Raise Concentration Risk, Unlikely to Opt for Lido-like Protocols

The potential approval of Ethereum exchange-traded funds (ETFs) in the United States, particularly those integrating staking, could significantly impact Ethereum’s concentration risk, warns a recent analysis by S&P Global Ratings.

In a report published Tuesday, analysts Andrew O’Neill and Alexandre Birry highlighted the potential implications of spot ether ETFs incorporating staking, suggesting these could alter validator concentrations within the Ethereum network.

“U.S. spot ether ETFs that incorporate staking could become large enough to change validator concentrations in the Ethereum network, for better or worse,” the analysts said, as they emphasized the importance of understanding how ETF issuers’ choices may influence concentration risks.

Anticipating approval from the U.S. Securities and Exchange Commission (SEC) as early as May, the analysts highlighted that this would mark the SEC’s first deadline for approving such funds.

Notably, several major firms, including industry giants like BlackRock and Fidelity, have filed for spot ether ETFs. Some applicants, such as Ark Invest and Franklin Templeton, also aim to enhance yield by staking the underlying ether.

However, the analysts suggested that spot ether ETFs are unlikely to opt for decentralized protocols like Lido, the current largest Ethereum validator, preferring instead institutional crypto custodians.They emphasized how much the concentration is affected depends on if companies spread out their investments among different custodians.

“Coinbase acts as a custodian in eight of the 11 recently approved U.S. bitcoin ETFs and is named as a staking institution by three of the four largest ether staking ETFs outside the U.S.,” the analysts said. They further noted that the emergence of new digital asset custodians could enable ETF issuers to mitigate risk by spreading their stakes across different entities.

The concerns over concentration risk in Ethereum’s ecosystem were echoed by JPMorgan analysts, who highlighted Lido as the largest validator. They cautioned against centralization, noting its potential to create vulnerabilities within the network and undermine the interests of the broader community.

As discussions around Ethereum ETF approval continue, stakeholders are closely monitoring regulatory developments and potential strategies to mitigate concentration risks in the network.

The industry necessitates careful consideration and proactive measures to maintain the integrity and resilience of Ethereum’s ecosystem.

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