Ethereum ETF could pose “serious” security risk, experts say

Experts are warning that the newly approved US spot Ethereum ETF could pose a threat if staking is ever introduced.

In a significant effort to move the approval process along, Ethereum ETF issuers removed language regarding the staking of customer ETH.

When the network transitioned to proof of stake consensus in September 2022, it required locking up ETH in a process called staking. The staked ETH belongs to validators who help secure the network. They are rewarded for staking their ETH, but can be penalized if they don’t verify transactions in time.

Centralization concerns have arisen in the past when single validators gained control over large portions of staked ETH. At times, people have even compared liquid staking provider Lido to a “cartel” when its size grew.

“Removing the staking language from the ETH ETF application was a move to appease the SEC. But this short-term solution could create long-term problems.” Ganesh Swami, CEO and co-founder of blockchain data analytics company cooperatertold decrypt“If multiple ETFs use the same custodian, this type of centralization will increase concentration, exposing the network to operational risks such as malicious collusion.”

Taking a look at the US Spot Bitcoin ETF, we can see that Coinbase is the custodian for it 90% of total assetsWhile this already poses an obvious risk of centralization, adding stakes to the equation increases the risk even further.

“Staking ETH ETFs is not a new concept, they exist in other countries as well, but obviously the US market is much more massive,” Andrew O’Neill, S&P Global’s head of analytics on digital assets explained decrypt“The risk in that case is that if ETFs are concentrating their holdings with a small number of custodians, this could lead to validator concentration risk in the consensus mechanism.”

Coinbase, which already Second Largest Ethereum Validatoris currently set to become the patron of at least six out of nine The firm plans to launch an Ethereum ETF. If we see the same kind of interest that we saw in the US spot bitcoin ETFs, which as a group are currently Market capitalization $54 billionThis concentration of power can pose a security threat.

“You can measure concentration risk by the number of nodes a single entity needs to control the chain. The lower this number, the greater the central point of failure.” Mona El Eissa, CEO and co-founder of Institutional DeFi Company Avantgarde Financetold decrypt“If any party accumulates that much control, they can potentially alter the state of the blockchain. This could pose a serious security risk.”

It appears that staking was removed from the Ethereum ETF application because the SEC believed staking was equivalent to a securities service. This is not without precedent. The SEC has sued companies like Kraken and Coinbase to prevent them from offering staking services to US customers.

Since staking is not currently permitted for ETF providers or custodians, no guidelines have been put in place to mitigate potential centralization and concentration risks.

Edited by Stacey Elliott.

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