JPMorgan says Ethereum could avoid 'security' label amid decreasing Lido share

The declining market share of Lido, Ethereum ETH +1.88% 's largest liquid staking protocol, indicates that Ethereum would likely avoid being classified as a security in the future, according to JPMorgan analysts.

"The share of Lido in staked ETH has decreased further from around one third a year ago to around a quarter at the moment," JPMorgan analysts, led by Nikolaos Panigirtzoglou, wrote in a report on Wednesday. "This should reduce concerns about concentration in the Ethereum network, thus raising the chance that Ethereum will avoid being designated as security in the future."

Last October, JPMorgan analysts expressed concerns that platforms like Lido, although being decentralized liquid staking protocols, "involve a high degree of centralization" and pose risks to Ethereum. However, these concerns have seemingly eased with Lido's decreasing market share.

The analysts pointed out that network decentralization plays a role in determining the classification of a digital token as a security, as highlighted by the release of the "Hinman documents" by the U.S. Securities and Exchange Commission last June. At the time, SEC officials noted that tokens operating on a "sufficiently decentralized" network might not meet the criteria to be deemed securities, primarily due to the lack of a controlling entity in the Howey sense.

Following the release of the Hinman documents last year, JPMorgan analysts had said U.S. lawmakers could create a new "other category" to accommodate Ethereum, thus avoiding its classification as a security while ensuring investor protection. SEC chairman Gary Gensler has refused to comment on whether Ethereum is exempt from securities regulations.

Another positive for Ethereum: The recent Dencun upgrade

Ethereum's recent Dencun upgrade has significantly reduced transaction costs for Ethereum Layer 2 networks, increasing their transaction count and total value locked. This development positions Ethereum as an "ultimate settlement layer for the Ethereum ecosystem," according to the JPMorgan analysts.

"Effectively via using Ethereum Layer 2 and emerging Layer 3 solutions, developers could now settle transactions within the Ethereum ecosystem instead of switching towards other alternative Layer 1 chains to deploy their applications," the analysts noted.

Following Dencun, the analysts said the next major upgrade on Ethereum's roadmap is Petra, which is slated to go live later this year. Petra will add Verkle trees to save space and speed up block verification by clearing out old blocks, which will further benefit Ethereum, according to the analysts.