Crypto Experts Warn of Security Risks with Ethereum Spot ETFs Approval

Crypto experts are sounding the alarm on potential security risks stemming from centralization concerns following the approval of Ethereum spot ETFs in the United States. The integration of staking in these ETFs could exacerbate the situation, leading to serious consequences for network security.

The issuers of Ethereum ETFs had to make a crucial decision to remove the staking clause from their applications in order to secure approval. However, this move could have lasting effects on the security of the network. Validators in the Ethereum network are required to lock up their ETH through staking since the transition to proof-of-stake in September 2022. While they receive rewards for securing the network, they also face penalties for poor performance.

Centralization issues have already surfaced, with some validators accumulating a significant portion of staked ETH, drawing comparisons to a “cartel.” Ganesh Swami, CEO of Covalent, highlighted the potential risks, stating that the concentration of custodians among multiple ETFs could lead to operational risks like malicious collusion.

Spot Bitcoin ETFs in the US have already demonstrated the dangers of centralization, with Coinbase holding 90% of total assets. Adding staking to the mix could further exacerbate the situation. Andrew O’Neill of S&P Global warned that if ETFs concentrate their participation with a small number of custodians, it could create risks of concentration among crypto validators.

Coinbase, a major Ether validator, is expected to serve as the custodian for six out of nine companies planning to launch an Ethereum ETF. This concentration of power could pose a threat to network security if the enthusiasm for Ethereum ETFs mirrors that of Bitcoin ETFs.

Mona El Isa of Avantgarde Finance emphasized the importance of assessing concentration risk by evaluating the number of nodes a single entity would need to control the chain. The lower this number, the higher the risk of a single point of failure.

The SEC views staking as a securities service, leading to its exclusion from Ethereum ETF applications. However, the lack of clear guidelines from authorities on mitigating centralization risks without staking poses a challenge. The SEC has already taken legal action against Kraken and Coinbase to prevent them from offering staking services to US clients.

In light of these concerns, crypto experts are urging heightened vigilance regarding Ethereum ETFs to prevent significant security risks. Collaboration between regulators and industry players is essential to establish clear guidelines aimed at reducing potential risks and ensuring the long-term security of the Ethereum network.