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.
Read more: JPMorgan Sees Concerns for Ethereum Blockchain After the Merge
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