US ether spot exchange-traded funds (ETFs) could be approved as early as May this year, but certain funds with staking functionality could introduce new concentration risks for the Ethereum blockchain. 

In a Feb. 20 report, analysts at S&P Global said that an increase in ether staking ETFs could affect the mix of validators participating in the Ethereum network’s consensus mechanism.

The S&P analysts, Andrew O’Neill and Alexandre Birry, noted that while the participation of institutional custodians could reduce the current concentration on the decentralized staking protocol Lido, it could also introduce new concentration risk if a single entity is chosen to stake the bulk of ether included in these ETFs.

Lido is the largest Ethereum validator with $29.2 billion in total value locked (TVL), according to DefiLlama. Industry watchers have often pointed to the staking provider’s dominance in the liquid token staking market as a concern, arguing that Lido’s 31% market share presents a significant centralization threat to Ethereum.

However, Marin Tvrdić, the protocol relations contributor for Lido, explained in an interview with CoinDesk last year that neither the decentralized autonomous organization (DAO,) nor the protocol itself, holds custody of users’ ether, or staked ether.  

“At no point is it a custodial solution,” Tvrdić said. “At every single point in time, from the moment ether enters the protocol and gets deposited on a validator, it’s self-custodial.”

S&P’s O’Neill and Birry believe that spot ether staking ETF issuers are unlikely to choose decentralized protocols like Lido, but rather an institutional crypto custodian.

“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,” they noted.

“The effect of U.S. spot ether ETFs on concentration risk, be it positive or negative, could be significant, which makes constant monitoring of concentration risk even more important,” they said.

Currently, there are eight spot ether ETFs being considered by the U.S. Securities and Exchange Commission (SEC), including Cathie Wood’s Ark Invest and 21Shares, Grayscale Investments, BlackRock, VanEck, Hashdex, Invesco and most recently, Franklin Templeton.