Morgan Stanley Says Crypto Ecosystem Is Becoming Less Decentralized

The Ethereum blockchain has become more centralized following the shift to proof-of-stake as 60% of validators are managed by only four companies, the report said.

AccessTimeIconOct 12, 2022 at 11:16 a.m. UTC
Updated May 9, 2023 at 3:59 a.m. UTC
10 Years of Decentralizing the Future
May 29-31, 2024 - Austin, TexasThe biggest and most established global hub for everything crypto, blockchain and Web3.Register Now

The crypto ecosystem is becoming less decentralized, Morgan Stanley (MS) said in a research report on Wednesday.

The underlying blockchains themselves may be decentralized, but as crypto regulation develops the need to run a large part of the blockchain on a single or small group of cloud providers becomes a potential risk, the report said.

The report said 65% of Ethereum’s nodes are cloud hosted, and half of these use Amazon Web Services (AWS). If certain service providers decide to censor some participants or crypto products or if there are lengthy server outages, this could become a problem.

The crypto ecosystem has evolved “with many applications, code, services and companies feeding into the underlying decentralized blockchains,” which Morgan Stanley says is causing some parts of the ecosystem to become less decentralized and more dependent on individual services.

The bank says this isn’t surprising as “centralization is a natural evolution of the financialization of cryptocurrency markets,” although it does bring new challenges.

Since the Ethereum blockchain shifted to proof-of-stake (PoS) last month, a transition known as the Merge, transactions are now approved by validators and 60% of these validators are managed by only four companies, the report said. The Ethereum community is aware of this centralization issue and is working on potential solutions.

The largest decentralized autonomous organizations (DAO) are also developing to become more like centralized companies, the bank said. The report noted decentralized exchange Uniswap recently voted to establish a foundation consisting of a management team, advisers and a board managing their own financial budget.

A DAO is a blockchain-based form of organization or company that is often governed by a native crypto token. Holders of these tokens can vote on important matters directly related to the DAO, and they typically use smart contracts in place of traditional corporate structures.

As the digital assets market has developed cryptocurrency products that comply with regulations and attract users, it is beginning to look more like the centralized banking world, the note said. At the same time, traditional finance (TradFi) is rapidly launching crypto products to offer transaction-based services and other related offerings for their clients.

Disclosure

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk offers all employees above a certain salary threshold, including journalists, stock options in the Bullish group as part of their compensation.

Author placeholder image

Will Canny is CoinDesk's finance reporter.


Learn more about Consensus 2024, CoinDesk's longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.