S&P Global Ratings has issued a warning that Ethereum's concentration risk may increase as a result of the potential approval of US spot Ethereum ETFs that include the staking feature.
These ETFs could be large enough to shift validator concentrations on the Ethereum network, S&P analysts Andrew O'Neill and Alexandre Birry noted in a report on Tuesday. They emphasized the importance of understanding how the choices of ETF holding companies will drive these concentration risks.
Analysts predict that the U.S. Securities and Exchange Commission (SEC) could approve spot ETH ETFs as early as May of this year. This will be the first deadline for approval of such funds. Many companies, including industry giants such as BlackRock and Fidelity, have applied for spot ETH ETFs. Among the applicants, particularly Ark Invest and Franklin Templeton, aim to generate additional returns mainly by staking Ethereum.
Currently, Lido, a decentralized liquid staking protocol, is the largest Ethereum validator, followed by Coinbase. S&P analysts believe spot ETH staking ETFs are unlikely to opt for decentralized protocols like Lido. Instead, they are likely to opt for an institutional cryptocurrency custodian. The impact on concentration will vary depending on whether companies diversify their holdings across multiple custodians.
“Coinbase acts as a custodian for eight of the 11 recently approved US Bitcoin ETFs and is named as a staking institution by three of the four largest ETH staking ETFs outside the US,” the analysts said. They added that the emergence of new digital asset custodians could enable ETF companies to spread their shares across different institutions and reduce this risk.
*This is not investment advice.
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