The latest upgrades to Ethereum, including the Merge and Shanghai, which have led to growth in ether (ETH) staking, have seemingly hurt the network, according to a recent report by JPMorgan.

“The rise in Ethereum staking since the Merge and Shanghai upgrades has come at a cost as the Ethereum network became more centralized and as the overall staking yield declined,” JPMorgan analysts led by Nikolaos Panigirtzoglou wrote in a note on Oct. 5.

The Merge, executed in September 2022, shifted the Ethereum blockchain from the proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) model, enabling staking. Meanwhile, the Shanghai hard fork came in April, allowing validators to withdraw the staked ether that has been locked in the network.

Liquid staking providers, including Lido, were major contributors to the network’s staking growth, which raises concerns about centralization. Platforms like Lido, although being decentralized liquid staking platforms, “involve a high degree of centralization,” the Wall Street bank noted. It said:

“The top 5 liquid staking providers control more than 50% of staking on the Ethereum network, and Lido specifically accounts for almost one-third.”

To address centralization concerns, the report noted that Lido has been adding more node operators to contain the number of staked ether being controlled by any single operator.

However, centralization by any entity or protocol creates risks for Ethereum as a “concentrated number of liquidity providers or node operators could act as a single point of failure or become targets for attacks or collude to create an oligopoly that would promote their own interests at the expense of the interests of the community,” the report added.

Besides centralization concerns, an added risk from the rise of liquid staking is rehypothecation, the report said. This practice involves reusing liquidity tokens as collateral across multiple decentralized finance (DeFi) protocols simultaneously. The report added that this could result in a series of liquidations if a staked asset drops sharply in value or is hacked or slashed due to a malicious attack or a protocol error.

The increase in staking has also reduced the appeal of ether from a “yield perspective” compared to rising yields in traditional financial assets, the report added. “The total staking yield has declined from 7.3% before the Shanghai upgrade to around 5.5% currently,” it said.

In September, JPMorgan said Ethereum witnessed a decline in network activity following the Shanghai upgrade. Ethereum’s daily transactions, daily active addresses, and total value locked of DeFi protocols on the network have all experienced declines, they said last month.