The potential approval of spot Ethereum (ETH) exchange-traded funds (ETFs) in the US, which includes plans for staking, might amplify concentration risks within the Ethereum network, S&P Global Ratings highlighted in a recent analysis.
According to the report, the SEC could approve ETH ETFs as early as May. However, as financial heavyweights vie for a stake in this emerging sector, the entry of ETFs could significantly sway the balance of validator power in Ethereum, posing new challenges and opportunities.
The SEC has to decide on VanEck’s application by May 23 and could rule on other ETH ETF applications by that deadline.
Concentration risks
Spot Ethereum ETF proposals from Ark Invest and Franklin Templeton aim to generate additional yield by staking ETH. However, if those staking-enabled ETFs see sufficiently high inflows, they could impact participation rates in Ethereum’s validation network, S&P Global analysts wrote.
According to the report, Lido currently accounts for a little under one-third of staked ETH and is the largest Ethereum validator. However, the report casts doubt on the likelihood of these ETFs opting for decentralized staking protocols such as Lido.
Instead, a preference for institutional crypto custodians seems more probable, suggesting a different impact on validator concentration depending on the diversification strategies of issuers.
The report also highlighted that Coinbase — which serves as a custodian for some funds — could also pose a concentration risk if it takes in new ETH on behalf of US ETFs.
The exchange is currently responsible for roughly 15% of staked ETH, making it the second-largest validator overall. It also serves as the custodian for three of the four largest non-US staking Ethereum ETFs.
The report said these issues are critical because reliance on a single entity or software client can introduce risks of validator outages and attacks. It called for greater monitoring of…
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