- The anticipation of Spot Ethereum ETF approval has stirred speculation in the market, however, S&P issues a cautionary note highlighting the concentration risk likely to be brought by the approval.
- According to S&P, approval of Ether ETF in the U.S. is expected, incorporating staking and potentially increasing Ether concentration risks.
Analysts foresee Spot Ether ETF to be approved by May 23rd, following the green light for the spot Bitcoin ETF on January 10th. Unlike Bitcoin ETFs, which secure their holdings in vaults, Spot Ether ETFs secure their holdings in stakings. Staking is a procedure where participants’ network operations are supported, transactions are secured, and rewards are given.
In a report by S&P analysts Andrew O’Neil and Alexander Birry, understanding how ETF issuers will impact concentration risks proves challenging. The analyst went ahead and wrote “An increase in ether staking ETFs could affect the 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 protocol. However, it may also introduce new concentration risk, particularly if a single entity is chosen to stake the bulk of ether included in these ETFs.”
However, the analyst influential investment institutions like Ark Investment and Franklin Templeton could significantly influence validators’ power. They posit, “Spot ether ETFs that simply hold Ether will not affect the validator mix in Ethereum’s consensus mechanism. Spot Ether ETFs that include staking, however, will do exactly that—at least if inflows are high enough,” added the analysis. “U.S. Spot Ether ETFs that incorporate staking could become large enough to change validator concentrations in the Ethereum network, for better or worse.”
Nevertheless, significant threats loom between Coinbase and Lido, two pivotal players in Ethereum staking, raising concerns about validator concentration. Lido claims the top spot holding 31.7% of staked Ethereum, closely followed by CoinBase, which holds 14.4%. However, when launching Ether ETF staking, it is unlikely for U.S. institutions to engage with Lido due to regulatory and risk considerations. Instead, they might shift their concentration to a centralized institution like Coinbase, a major exchange with the potential for validator control. The evolving landscape presents challenges and potential risks as the market navigates the intricacies of ETF approval and the dynamics of Ethereum staking concentration.