Experts say Ethereum ETFs could pose “serious” security risks.

Experts are warning of a looming threat that could arise if staking is introduced to the newly approved US spot Ethereum ETF.

In a significant attempt to push the approval process to the limit, the Ethereum ETF issuer has removed language regarding customer ETH staking.

When the network switched to a proof-of-stake consensus in September 2022, ETH had to be tied up in a process called staking. Staked ETH is owned by validators who help secure the network. If you stake ETH, you will be rewarded, but if you do not confirm your transaction in time, you may be penalized.

In the past, concerns about centralization were raised when a single validator could control a significant portion of staked ETH. At times, people have compared liquidity staking provider Lido to a “cartel” as it grew in size.

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

If we look at US spot Bitcoin ETFs, we see that Coinbase controls 90% of all assets. This already poses obvious centralization risks, but adding staking to the equation raises the stakes.

“ETH ETF staking is not a new concept and exists in other countries, but it clearly brings a much larger scale to the U.S. market,” said Andrew O’Neill, head of digital asset analysis at S&P Global. decryption. “The risk in this case is that if the ETF concentrates holdings in a small number of custodians, the consensus mechanism may introduce validator concentration risk.”

Coinbase, already the second-largest Ethereum validator, will become the custodian of at least six of the nine companies currently planning to launch Ethereum ETFs. This concentration of power could pose a security risk if it sees similar interest as the U.S. spot Bitcoin ETF, which currently has a market capitalization of $54 billion.

“Concentration risk can be measured by the number of nodes required for a single entity to control the chain. “The lower this number, the higher the central point of failure.” Mona El Isa, CEO and co-founder of Avantgarde Finance, an institutional DeFi company, said: decryption, “If any party gains that much control, they can potentially change the state of the blockchain itself. “This poses a serious security risk.”

Staking appears to have been removed from the Ethereum ETF application due to the SEC’s view that staking is equivalent to securities services. It’s not that there are no priorities. The SEC is suing companies like Kraken and Coinbase to stop providing staking services to US customers.

As staking is not currently permitted by ETF providers or custodians, there are no guidelines in place to reduce potential centralization and concentration risks in the future.

Edited by Stacey Elliott.