Ethereum's New Proposal Could Eliminate Staking Rewards at 50% Supply

New Staking Proposal Overview

A recent proposal, EIP-8361, seeks to shift Ethereum's validator reward framework by implementing decreasing rewards when staking exceeds 50% of the total ETH supply. Under this plan, a portion of the rewards would be burned, potentially eliminating staking rewards altogether at the saturation point of 60.25 million ETH.

According to developers, the validator queue is currently adding about 1.75 million ETH each month, and delays in addressing this could lead to significant drops in staking ratios. The proposal aims to counteract excessive staking, which could compromise network security by concentrating ETH among fewer large operators.

Impact on Staking Dynamics

At present, over one-third of the Ethereum supply is staked, yielding around 2.6%. If EIP-8361 is activated, yields could fall to as low as 1.2%. The transition plan includes an 18-month phase where base rewards will temporarily increase before being tapered off.

Proponents of the proposal argue that such changes are necessary to stabilize the staking environment and protect against risks posed by large custodial entities. They believe that it is crucial to act swiftly, as estimates suggest that up to 70 million ETH could be staked by January 2028, exacerbating these issues.

Criticism from Industry Experts

However, some industry experts, including Isidoros Passadis from Lido, have raised concerns about the complexity and ambition of the proposal. He argues that it risks undermining Ethereum's unique characteristics by overly simplifying ETH's role in the ecosystem. Passadis warns that the approach might inadvertently incentivize larger operators over smaller, decentralized ones, thereby compromising network integrity.

De Tychey has countered these criticisms, asserting that the proposal is designed to protect the network from unchecked dilution and provide a more equitable staking model for all participants.