There is a risk in Ethereum if ETFs are approved, says S&P Global

Approval of an ether (ETH) exchange-traded fund (ETF) is a possibility by 2024. If this happens, market analysts warn of increasing centralization across the network’s validator pool. .

“US spot ether ETFs that incorporate staking could become large enough to change concentrations of validators on the Ethereum network, for better or worse,” says a report from S&P Global, signed by analysts Andrew O’Neill and Alexandre Birry.

US Securities and Exchange Commission (SEC) could approve ether ETFs in May, when the first deadline arrives to issue a ruling on the topic. It should be remembered that the approval of 11 spot bitcoin (BTC) ETFs occurred this year, in January, as reported by CriptoNoticias. Several major asset management firms, such as BlackRock, Ark Invest, Franklin Templeton and Fidelity, already offer this service to their clients, and also plan to provide an identical one with the Ethereum network cryptocurrency.

Possible consequences of an ETF for Ethereum

If ether ETFs were to finally start trading, they could impact the network in two ways. On the one hand, promoting the emergence of new validators. Running on proof of stake (PoS), Ethereum requires validators to deposit and block 32 ETH to contribute to the confirmation of transactions and blocks and obtain rewards in return. This process is called staking.

Ark Invest and Franklin Templeton intend to stake the ETH they purchase, says the cited report. In this way, the large investments raised by these funds could help reconfigure the network’s validator map, which has Lido as the absolute dominator. Coinbase is a major staking pool, but it accumulates similar market share to RocketPool or Binance, among others.

Precisely, The other way ether ETFs can influence the network is by boosting Coinbase’s presence as a validator. The advantage of the American company over Lido, a decentralized staking platform, is that it projects greater regulatory confidence and, therefore, it would be the preferred one of ETF offerers. At the time of writing, Coinbase has around 25,000 validators (2.5% of the network’s total).

The choice of custodians for each company’s cryptocurrencies will be a key point to see how the approval of ETFs affects Ethereum. If everyone leans toward Coinbase (at least three asset managers would, S&P says), the exchange’s share of Ethereum staking will increase.

The risk of centralization in Ethereum

If the range of validators diversifies, it is better for Ethereum. As the main developers of that protocol have warned, Decentralization is a highly desired feature as it reduces the risk of censorship to certain transactions or actors. This means that if a government tells Lido or Coinbase not to process certain transactions – as is currently the case, in fact – there must be other validators capable of doing so.

On the other hand, centralization generates certain points of failure that are easier to attack by external agents who want to harm Ethereum. This is the case of clients, which are software that connect the nodes with the network. Recently, validators were put on alert due to the wide preference (85%) for the geth client in the execution layer (where blocks are created), which gave the possibility of finalizing blocks without the participation of nodes that use other clients. This creates a major failure point in Ethereum.

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