Morgan Stanley says the crypto ecosystem is becoming less decentralized

The crypto ecosystem is becoming less decentralized, Morgan Stanley ( MS ) said in a research report on Wednesday.

The underlying blockchains themselves may be decentralized, but as crypto regulation evolves, the need to run a large portion of the blockchain on a single or small group of cloud providers becomes a potential risk, the report said.

The report said that 65% of Ethereum’s nodes are cloud-hosted, and half of those use Amazon Web Services (AWS). If certain service providers decide to censor some participants or crypto products, or if there are prolonged server outages, this can become a problem.

The crypto ecosystem has evolved “with many applications, code, services and companies that are part of the underlying decentralized blockchains,” which Morgan Stanley says is causing some parts of the ecosystem to become less decentralized and more dependent on individual services.

The bank says this is not surprising since “centralization is a natural evolution of the financialization of cryptocurrency markets,” although it presents new challenges.

Since the Ethereum blockchain switched to proof-of-stake (PoS) last month, a transition known as Merge, transactions are now approved by validators and 60% of those validators are managed by just four companies, the report said. The Ethereum community is aware of this centralization problem and is working on potential solutions.

The largest decentralized autonomous organizations (DAOs) are also evolving to become more like centralized companies, the bank said. The report noted that decentralized exchange Uniswap recently voted to establish a foundation consisting of a management team, advisors and a board that manages their own financial budget.

A DAO is a blockchain-based form of organization or company that is often governed by a native crypto token. Holders of these tokens can vote on important issues directly related to the DAO, and they typically use smart contracts instead of traditional corporate structures.

As the digital asset market has developed cryptocurrency products that comply with regulations and attract users, it is beginning to look more like the centralized banking world, the note said. At the same time, traditional finance (TradFi) is rapidly launching crypto products to offer transaction-based services and other related offerings to its customers.

Read more: JPMorgan Sees Concerns About Ethereum Blockchain After The Merger