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S&P Rating: Ethereum spot ETF integration of collateral could lead to centralization risk of collateral.

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S&P Rating: Ethereum spot ETF integration of collateral could lead to centralization risk of collateral.

The Block referenced a report from S&P analysts Andrew O’Neill and Alexandre Birry, stating that an Ethereum spot ETF covering "stake functionality" could significantly alter the concentration of Ethereum validators as the asset size grows.

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Will Ethereum ETF Introducing Staking Lead to Centralization of Staking?

Analysts cite the example of Bitcoin ETFs, where Coinbase serves as the custodian for 8 out of 11 Bitcoin ETFs. Currently, Coinbase is also designated as the custodian for 4 Ethereum staking ETFs outside of the U.S.

Analysts suggest that the emergence of new large custodians could allow ETF issuers to distribute ETH for staking among different institutions to reduce the risk of centralization, potentially addressing concerns about Coinbase's staking market share.

Issuers such as Ark Invest and Franklin Templeton have already begun discussions on staking functionality and regulatory compliance in their application documents.

Ark Revises Ethereum Spot ETF Application, Shifts to Cash Redemption Model, Staking Returns Under Discussion with SEC

S&P: Issuers Unlikely to Choose Lido for Staking

Liquid staking protocol Lido is currently the largest Ethereum validator, followed by Coinbase.

S&P analysts believe that ETF issuers are unlikely to choose decentralized protocols like Lido; instead, they may opt for custodians.

J.P. Morgan analysts have recently warned about the concentration risk of Ethereum staking, pointing out that Lido, as the largest validator, could be vulnerable to single points of failure, become a target for attacks, or intentionally monopolize to strengthen the Lido protocol itself.

Is S&P Overthinking?

However, according to data from BitcoinTreasuries, all Bitcoin-related ETF products collectively hold 876,000 BTC, accounting for only about 4.17% of Bitcoin's circulating supply.

Considering the lower attractiveness and trading volume of Ethereum ETFs, how much ETH would be locked up in circulation? And could this significantly alter Ethereum's staking ecosystem and potentially lead to centralization?

Perhaps instead of worrying about the increasing staking market share of institutions like Coinbase, it might be better to address the dominant position of Lido. This is a question that Ethereum developers, and even Ethereum's co-founder Vitalik Buterin, have raised, suggesting limiting the share of a single validator entity through fee rates and other means.

Lido holds over 30% of the liquid staking market! Does Ethereum's 22% validator limit really need to be reconsidered?