(Bloomberg) -- The prospect of a US approval of Ether exchange-traded funds threatens to exacerbate the Ethereum ecosystem’s concentration problem by keeping staked tokens in the hands of a few providers, S&P Global warns. 

After the first spot Bitcoin ETFs were approved in January, investors are expecting Ethereum’s native token to be next. Some of the spot Ether ETFs applications — namely ones from Ark Investment Management and Franklin Templeton — are proposing to allow staking, that is when Ether holders lock their tokens to the Ethereum network to help validate transactions and to earn additional yields.

Such ETFs “could become large enough to change validator concentrations” in the Ethereum network, according to S&P analysts Andrew O’Neill and Alexandre Birry. In turn, that could expose the network to operational risks, such as inactivity resulting from a single point of failure, or malicious collusion. 

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Looking at the inflows that have gone into Bitcoin ETFs since last month relative to the volume of staked Ether today, “there’s a potential to move the needle in terms of concentration risk,” said O’Neill, who co-chairs S&P Global’s digital assets research lab, in an interview. 

Coinbase Global Inc. is already the second-largest validator — or provider which validates blocks into a blockchain — in the Ethereum network, controlling about 14% of staked Ether. The top provider, Lido, controls 31.7% of the staked tokens, the analysts wrote, citing Dune Analytics and Rated data. 

US institutions issuing Ether-staking ETFs are more likely to pick an institutional digital asset custodian, such as Coinbase, while side-stepping decentralized protocols such as Lido. That represents a growing concentration risk if Coinbase takes a significant share of staked ether, the analysts wrote. 

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Coinbase is already a staking provider for three of the four largest ether-staking ETFs outside the US, they wrote. For the recently approved Bitcoin ETF, Coinbase was the most popular choice of crypto custodian by issuers. The company safekeeps about 90% of the roughly $37 billion in Bitcoin ETF assets, chief executive officer Brian Armstrong said during an earnings call last week. 

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Ark and Franklin Templeton have both said they may stake the assets through one or more third-party staking providers.  

Overall, ETFs’ effect on concentration will depend on whether the issuers spread their stakes across multiple custodians, the analysts wrote. 

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