How Ethereum's Nakamoto Coefficient Exposes the Blockchain's Real Centralization Challenge

When S&P Global recently raised concerns about concentration risks in Ethereum, they weren’t the first traditional finance analysts to notice a troubling pattern. As institutional interest in crypto grows—particularly with the prospect of ether staking ETFs—a critical question emerges: just how decentralized is Ethereum really? The answer lies in a metric called the Nakamoto Coefficient, a measurement that reveals far deeper centralization issues than most investors realize.

Understanding the Nakamoto Coefficient: Ethereum’s Decentralization Scorecard

The Nakamoto Coefficient, first proposed by Balaji Srinivasan and Leland Lee, measures blockchain decentralization by calculating how many nodes would need to collude to control the entire network. Think of it as a network’s resilience score—the higher the number, the more distributed and resistant to control the blockchain becomes. For context, a Nakamoto Coefficient of 2 means just two entities could theoretically coordinate to compromise the chain.

This is precisely where Ethereum stands, according to current on-chain analysis. That figure represents a dramatic vulnerability that extends across multiple layers of the network. When a blockchain’s Nakamoto Coefficient is that low, it fundamentally undermines the decentralization promise that crypto is built upon. Traditional finance analysts like those at S&P Global have begun scrutinizing this metric more closely because it directly impacts the risks associated with institutional investment vehicles like ETFs.

The metric becomes even more relevant when comparing networks. Protocols like Aptos, Avalanche, and Polkadot all maintain significantly higher Nakamoto Coefficients, reflecting much more distributed validator participation. These networks, however, remain largely excluded from SEC considerations for spot ETFs, partly due to regulatory classification concerns that label them as potential securities.

The Validator Concentration Trap: Where Ethereum’s Centralization Risk Emerges

One of Ethereum’s most visible centralization points is in its validator ecosystem. Lido, the dominant liquid staking platform, controls just under 33% of all Ethereum validators—a concentration that alone raises red flags for network resilience. Coinbase adds another 15% through its own staking operations. Together, these two entities command nearly half of all staking participation, a level of concentration that would be unthinkable in a truly decentralized system.

S&P Global’s recent analysis highlighted how U.S. spot ether ETFs that incorporate staking could either mitigate or worsen this problem. If ETF issuers choose to work with institutional custodians and deliberately spread their validator allocations across multiple independent operators, they could theoretically reduce overall concentration. Conversely, if they concentrate their stakes with existing major players, the centralization problem deepens further.

What makes this scenario particularly relevant now is that the institutional staking ETF market hasn’t fully materialized yet. The decisions made by major asset managers in structuring these vehicles will have lasting consequences for Ethereum’s long-term network health.

The Client Diversity Crisis: Why Geth’s Dominance Matters

Beyond validators, Ethereum faces a critical vulnerability in its execution client layer. Geth—short for “Go Ethereum” and maintained primarily by the Ethereum Foundation—commands over 60% of the execution client market. While this represents an improvement from its historical dominance of approximately 80%, it still constitutes a supermajority that poses significant systemic risk.

The danger became apparent in January 2024 when a bug in Nethermind’s client software knocked 8% of validators offline temporarily. That incident raised an uncomfortable question: what would happen if a similar vulnerability emerged in Geth, given its commanding market share? A widespread bug in Geth could potentially disable a supermajority of the network, effectively halting transaction processing and smart contract execution.

Prysm, the leading consensus client, faces similar concentration issues by controlling around 40% of that layer. While less severe than Geth’s situation, this still represents an unhealthy degree of centralization in what should be a redundant, distributed system.

These client concentration risks directly contribute to Ethereum’s Nakamoto Coefficient being stuck at such a low level. The more concentrated the client distribution, the fewer nodes are truly independent—and the lower the coefficient becomes.

From Blockchain to Balance Sheet: Why Wall Street is Watching

S&P Global’s warning signals something important: traditional finance now views Ethereum’s centralization metrics with the same scrutiny they’d apply to any critical infrastructure investment. Morgan Stanley has previously flagged similar concerns about Ethereum’s relative centralization compared to Bitcoin, indicating this isn’t a fringe concern but rather mainstream institutional analysis.

The recent data shows Ethereum’s concentration extends even to individual addresses. Current on-chain analysis reveals that the top 10 addresses hold 73.88% of ETH, top 20 addresses command 76.29%, and the pattern continues—top 50 addresses control 80.22%, while the top 100 control 83.87%. These figures underscore that Ethereum’s centralization challenges operate across multiple structural levels.

This multilayered concentration creates a paradox: as Ethereum becomes more attractive to institutions precisely because of its maturity and validator diversity improvements, those same institutional actors risk deepening concentration through their staking decisions.

Paths to Improvement: Why Decentralization Must Evolve

Not all news is pessimistic. Some metrics have genuinely improved. Geth’s decline from 80% to 60%+ demonstrates that deliberate client diversity efforts can work. The broader validator ecosystem, while concentrated, has stabilized with awareness of the risks. The real catalyst for change may be—counterintuitively—the wave of institutional interest driven by ETF approvals and growing acceptance from traditional finance.

If Ethereum’s ecosystem can channel that institutional capital wisely—through deliberately diverse staking strategies, continued client innovation, and conscious network governance—it might finally move the needle on its Nakamoto Coefficient. The blockchain’s technical roadmap and community discussions increasingly focus on these exact challenges, suggesting that decentralization isn’t a neglected issue but rather a priority area for development.

The real test will come when staking ETFs begin flowing into Ethereum’s validator network. That moment will reveal whether institutions view the network as a mature infrastructure investment to be consolidated, or as a decentralized protocol to be supported precisely because of its distributed nature. Ethereum’s future centralization trajectory depends entirely on those choices.