An approval of proposed Ethereum ETH -3.83% exchange-traded funds in the U.S., which intend to incorporate staking, could increase Ethereum's concentration risk, according to analysis from S&P Global Ratings.

"U.S. spot ether ETFs that incorporate staking could become large enough to change validator concentrations in the Ethereum network, for better or worse," S&P analysts Andrew O'Neill and Alexandre Birry said in a report published Tuesday. "It is therefore critical to understand how ETF issuers' choices will drive concentration risks."

The analysts predict that the U.S. Securities and Exchange Commission will approve spot ether ETFs as early as May of this year — its first deadline to approve such funds. Several firms, including giants like BlackRock and Fidelity, have filed for spot ether ETFs. Some among those applicants, most notably Ark Invest and Franklin Templeton, also aim to generate additional yield by staking the underlying ether.

Spot ether ETFs unlikely to select Lido-like protocols for staking

Lido, a decentralized liquid staking protocol, is currently the largest Ethereum validator, followed by Coinbase. According to the S&P analysts, spot ether staking ETFs are unlikely to choose decentralized protocols like Lido. Instead, they are likely to choose an institutional crypto custodian. The analysts noted that the impact on concentration will vary based on whether issuers diversify their stakes across multiple custodians.

"Coinbase acts as a custodian in eight of the 11 recently approved U.S. bitcoin ETFs and is named as a staking institution by three of the four largest ether staking ETFs outside the U.S.," the analysts said. "The emergence of new digital asset custodians may enable ETF issuers to spread their stakes across different entities and mitigate this risk," they added.

JPMorgan analysts also recently warned of Ethereum's concentration risk, with Lido being the largest validator.

"Needless to say that centralization by any entity or protocol creates risks to the Ethereum network as a concentrated number of liquidity providers or node operators could act as a single point of failure or become targets for attacks or collude to create an oligopoly that would promote their own interests at the expense of the interests of the community, e.g. by censoring certain transactions or by front running on end users' transactions," the JPMorgan analysts said at the time.