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What problems does Ethereum face before the merger?

What problems does Ethereum face before the merger?

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Ethereum seems to have some issues before the launch of The Merge. However, in its latest report, blockchain analysts at Nansen argue that most concerns are largely unfounded. Accordingly, the merger will not harm Ethereum’s core value proposition.

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With less than two days to go before Ethereum transitions to a proof-of-concept system, all eyes are on the merger. However, many are still concerned about whether the upgrade will change the crypto market for the better.

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According to the latest report from the analysis firm Nansen, the problems that Ethereum’s PoS will bring are undeniable. However, the company believes that most concerns are largely unfounded. Will Ethereum weather this storm and emerge as a stronger and more resilient blockchain?

Does the Merger Make Ethereum a More Centralized System?

One of the biggest debates surrounding the merger is how much Ethereum will be centralized as a result.

Nansen reports that around 80,000 unique addresses will participate in staking on Ethereum. And while that number may seem high, a glance at the landscape of intermediary betting providers shows that there is quite a bit of centralization going on.

In total, 11.3% of the ETH supply was involved. This corresponds to 13.5 million ETH. Lido, a decentralized liquid stack protocol, accounts for 31% of the total ETH at stake. Coinbase, Kraken and Binance account for about 30%.


The graph shows the distribution of the ETH staked by company (Source: Nansen)

Exchanges like Coinbase, Kraken, and Binance are required to comply with the regulations of the countries in which they operate. Because of this, most of the market is not focused on the centralization issues they can create – but on the centralization that decentralized services like Lido can create.

Looking more closely at the liquid stack solutions market, Lido’s share becomes even higher. According to Nansen, Lido represents 47% of the liquid ETH staking. Coinbase, Kraken and Binance, on the other hand, make up 45% together. A look at liquid stack providers excluding the core exchanges shows the extent of Lido’s dominance. They represent 91% of the liquid stack market.

Lido is a service provider managed by the Lido DAO. It is structured to allow multiple validation sets. The structure of the DAO makes it difficult for regulators to target them.

Many believe, however, that Lido’s weakness lies in his sign. Nansen’s comment in the report: Centralizing the ownership of LDO tokens could leave Lido vulnerable and exposed to centralization risks. The top nine wallets holding the LDO token hold 46% of the governing power and could theoretically exert significant influence over Ethereum collectors.

Nansen in the report:

“If Lido’s market share continues to increase, it is possible that the Lido DAO will have the majority of Ethereum collectors. This could allow Lido to take advantage of opportunities such as multi-block MEV, perform profitable block reorganization, and in the worst case, censor certain transactions by forcing or rewarding collectors to work according to Lido’s wishes (through governance). This could cause problems for the Ethereum network.”

Important to note: Lido is actively working to mitigate these centralized risks. The platform is considering adopting a dual governance model with LDO and STETH. But instead of making stETH a governance token, he would just vote against a proposal from Lido that could have a negative impact on stETH holders.

The Merger: sell-off and destabilization risk?

Another major concern with the merger is the possibility of a major sale. In his report, Nansen notes that stakeholders will not be able to dump their ETH on the market. All ETH involved will be locked up until the Shanghai upgrade, which is scheduled to happen between 6 and 12 months after the merger.

The promised rewards will also be difficult to sell. According to the report, there is a validation queue with about 6 collectors per period. Since it takes about 6.4 minutes, it would take about 300 days to withdraw the 13 million ETH pledged.

When stakeholders are eventually able to withdraw their bets, Nansen believes that the illiquid bookmakers will most likely sell. The report also notes that most of the sales will be for profit.

If the market remains neutral or slightly bullish, most of the unhedged ETH will most likely leave the market. Even if most stakeholders decide to sell illiquid, they only make up 18% of the total ETH involved. That means you probably won’t have the power to move the market significantly.

According to the report, another good sign of market stability is the wave of accumulation in smart money wallets and ETH wallets of millionaires and billionaires. Overall, ETH millionaires and billionaires have steadily accumulated Ethereum since the beginning of the year. Smart money wallets, historically focused on trading rather than pure accumulation, appear to be increasing their holdings.

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Text credit: Cryptoslate

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