Ethereum’s [ETH] concentration risks have become more apparent, especially as it waits for US spot ETF approval.
Even traditional finance (TradFi) has voiced concern about this risk, alluding to a zero-sum outcome if the US spot ETF gets a green light from the SEC.
In a February report, S&P Global singled out ETH staking, citing Lido [LDO] as one of the major concentration risks.
“An increase in Ether staking ETFs could affect a mix of validators participating in the Ethereum network’s consensus mechanism. The participation of institutional custodians could reduce the current concentration on the Lido decentralized staking platform.”
However, the report also noted that such a move may also “introduce new concentration risk, particularly if a single entity is chosen to stake the bulk of ether in these ETFs.”
As such, S&P Global called for consistent monitoring of concentration risk regardless of the impact of spot ETH ETFs.
Besides staking, Ethereum execution client software, especially Geth dominance, is another risk factor.
Vitalik Buterin’s “Rainbow Staking” solution
Speaking to ETH Taipei, Ethereum co-founder Vitalik Buterin mentioned a new “rainbow staking” proposal – A plan to enhance staking diversity using less than 32 ETH alongside a less overwhelming node operation.
Buterin expounded on rainbow staking, stating, “the idea here is that you explicitly split up into two kinds of staking, and you call it heavy staking and light staking.”
But he acknowledged the challenge of such a proposal;
“The less than 32 ETH part is more challenging and basically 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 make blocks too hard to process.”
The rainbow staking proposal is in the testing phase and will take longer to be an official solution to the staking concentration risk.
Meanwhile, some leading ETH holders running validator nodes, like Coinbase, embraced the calls for Ethereum execution client diversity and migrated to NethermindETH. But Geth execution client still have a supermajority at 66%.
In the meantime, the Ethereum Foundation is under SEC probe, which could affect spot ETH ETF. However, it is yet not specified whether concentration risks are part of the probe.