Ethereum Proposal to Slash Staking Rewards Sparks Backlash

A group of six Ethereum researchers and developers, including Ethereum Foundation’s Justin Drake, has proposed changing the network’s issuance policy to cut validator rewards more sharply as the proportion of staked ETH rises. 

The draft, called the Tapered Issuance Burn and currently being assigned the provisional number EIP-8363, would burn an increasing fraction of validators’ consensus rewards as the amount of staked ETH approaches a fixed threshold of 60.25 million ETH (around 50% of the current ETH supply), at which point the deduction hits 100%. The changes would phase in over 18 months. 

Tapered Issuance Burn Ethereum Improvement Proposal. Source: Github

The proposal has triggered backlash from developers, stakers and DeFi founders, who warn that the reward cuts could force out solo validators before larger institutions are affected, weaken institutional demand for ETH, and disrupt DeFi markets built around staking yield. 

One of the proposal’s authors, Jérôme de Tychey, said the changes are needed to address the rising share of Ether being staked, which passed 33% in April. The authors argue continued staking growth could concentrate ETH in large custodians and liquid staking providers, while unchecked issuance erodes Ether’s role as a neutral, trustless store of value. 

“Ever-growing issuance is a dilution tax on every holder: stake, or be diluted. At high ratios, LSTs and other staking derivatives displace raw ETH as the ecosystem’s working money, thus swapping the most neutral, trustless asset for intermediated claims on issuers,” he said.

Although EIP-8363 remains an early draft, its publication just two days before a deadline for proposals targeting Ethereum’s Hegotá upgrade has also raised concerns about whether there is enough time to consider the impacts on Ethereum’s tokenomics.

EIP-8363 authors’ argument to cut issuance 

The proposal’s authors argue that under the current curve, staking yield never drops below 1.5% even with all ETH in existence being staked. 

“The incentive to stake never switches off. Where does it stop? It doesn’t,” said de Tychey. 

With no changes, a worst-case scenario could see more than 55% of Ethereum supply locked in staking by 2028, he said. 

“Maximal neutrality & minimal dilution: those are the two fundamentals of a store of value. This EIP not only hardens both, it sets a bar no other blockchain clears.” 

The proposed policy would see issuance peak at 0.5% of ETH supply per year at its highest (around 20% of ETH is staked), declining to zero when the staking ratio of Ethereum hits the 60.25 million ETH threshold. 

Related: Ethereum treasury firms lean on staking as ETF pressure builds: Report

“ETH supply growth will be bounded and more predictable. Combined with the EIP-1559 and Blob burn, the supply will more often decrease. Ethereum, the most mature of all the protocols, with a sustainable security budget, will also be the least dilutive of all protocols,” said de Tychey.

The proposal’s broader direction has also received support from Grayscale. In May, Grayscale’s head of research Zach Pandl said limiting staking incentives would be “positive for the price of Ether over time.”

Critics say it’s punishing Ethereum’s growth

Aave founder Stani Kulechov said reducing staking rewards would weaken institutional demand for ETH and borrowing activity across DeFi, arguing the proposal “doesn’t achieve the outcome it tries to achieve and is actually hurtful for Ethereum.” 

Another argument is that the proposal would impact solo validators as they have generally higher relative costs and are more susceptible to reward changes, leading to a more concentrated validator set. 

“This will self evidently push out solo stakers who aren’t subsidized by the EF or others,” said Mike Silagadze, CEO of Ether.Fi. 

“It will essentially guarantee that the only ones staking are large centralized entities with zero cost of capital where users passively hold their ETH.”

De Tychey disputed this point, saying on the Ethereum Magicians forum that users of large staking providers must pay fees, making those services less attractive as rewards fall, though he acknowledged the research on this is still contested. 

The proposed network update will lower ETH issuance and inflation. Source: Zach Pandl

Others pointed to the seemingly rushed timeline to consider the proposal, though this appears to be due to confusion over the upcoming deadline on Aug. 6. 

“This clearly doesn’t leave adequate time for community review of a monetary policy change of this magnitude,” said Greg Koumoutsos, a co-author of EIP-8148 and EIP-8205.

Where the proposal currently stands

The Tapered Issuance Burn proposal has not been approved, scheduled or included in Hegotá.

While there is an Aug. 6 deadline relating to this proposal, the deadline is for pull requests proposing additional EIPs for Hegotá, not a deadline for deciding which proposals will be included. 

Ethereum community organizer Trent Van Epps said the selection process could continue until Nov. 8, and that Hegotá is likely to reach mainnet in the second quarter of 2027.

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