Experts are raising alarm bells over the potential security risks associated with the newly approved US spot Ethereum ETFs, particularly if staking is introduced to the equation. In a bid to secure approval, Ethereum ETF issuers have removed language pertaining to the staking of customer ETH, which some believe could lead to adverse consequences in the future.

Staking became a requirement when the Ethereum network transitioned to a proof of stake consensus in September 2022. Validators secure the network by locking up their ETH through a process called staking and are rewarded for their efforts. However, concerns about centralization emerged when single validators gained control over significant portions of staked ETH, with some comparing liquid staking provider Lido to a "cartel" due to its substantial size.

The removal of staking language from Ethereum ETF applications was seen as a move to appease the US Securities and Exchange Commission (SEC). Nevertheless, experts caution that this short-term solution might pose long-term problems. Ganesh Swami, CEO and co-founder of blockchain data analytics company Covalent, warns that if multiple ETFs rely on the same custodians, centralization and concentration risks could increase, potentially exposing the network to operational vulnerabilities such as malicious collusion.

Analyzing the US spot Bitcoin ETFs, it becomes evident that Coinbase serves as the custodian for 90% of the total assets, already posing a centralization risk. The addition of staking to the equation raises the stakes further. Andrew O'Neill, analytical lead on digital assets at S&P Global, highlights that the risk lies in the concentration of stake among a small number of custodians, potentially introducing validator concentration risks within the consensus mechanism.

Coinbase, already the second-largest Ethereum validator, is set to become the custodian for at least six out of the nine firms planning to launch an Ethereum ETF. If the interest mirrors that of the US spot Bitcoin ETFs, which currently boasts a market capitalization of $54 billion, this concentration of power could pose a significant security risk.

Mona El Isa, CEO and co-founder of institutional DeFi company Avantgarde Finance, emphasizes the potential for a central point of failure when concentration risk is too high. The ability for a single entity to control the chain raises serious concerns about altering the state of the blockchain and overall security.

The exclusion of staking from Ethereum ETF applications reflects the SEC's view that staking is akin to a securities service. The SEC has previously taken legal action against companies like Kraken and Coinbase for offering staking services to US customers. As of now, guidelines to mitigate potential centralization and concentration risks stemming from staking have not been established for ETF providers or custodians. This leaves a potential gap in security that experts believe should be addressed to safeguard the ecosystem.