Written by: KarenZ, Foresight News
Intuitively, the more ETH that is staked, the higher the economic cost of attacking the network.
But an increase in the scale of staking does not necessarily bring an equivalent degree of security gains; if new stakes mainly flow to a few large service providers, the validator ecosystem may instead become more concentrated.
On August 4, six researchers including EthCC founder Jérôme de Tychey and Ethereum Foundation's Justin Drake jointly submitted the "Tapered Issuance Burn" proposal, attempting to install a "downhill slope for returns" for the ever-growing staking rate, and when the staked amount approaches 50% of the total ETH supply, the consensus layer issuance rewards obtained by validators will be completely offset.
This proposal was initially published under the number EIP-8361, but since that number was already assigned to another proposal, it was subsequently changed to EIP-8363. Although it is still in the early draft stage, it has quickly become one of the most controversial topics in the Ethereum community.
What exactly does this proposal intend to do?
Currently, Ethereum's consensus layer rewards decrease as the total amount staked increases, but even if all ETH is staked, the nominal consensus yield for a single validator still has a theoretical lower bound of about 1.5%.
The authors of EIP-8363 believe that this means the protocol always provides positive incentives for more staking, with no real "stop button", potentially pushing ETH to concentrate in large custodians, exchanges, and staking derivatives.
Additionally, unstaked ETH will continue to be diluted by new issuance. LSTs, because they come with yields, are more easily replacing native ETH as DeFi collateral and savings assets. The proposal's authors hope to reduce this dilution pressure and make native ETH a more competitive neutral asset again.
The method proposed by the proposal is not to prohibit new validators from entering, nor to hard-lock the staking rate at 50%, but rather to deduct and burn a portion of the validator rewards after normal calculation. The burn ratio depends on the total effective staked balance on the network: calculated as "the 1.5th power of the ratio of the total effective staked balance to 60.25 million ETH", with a cap of 100%, that is:
60.25 million ETH is approximately half of the current total ETH supply. As the staked amount approaches this value, the net consensus layer yield for validators gradually approaches zero; after reaching or exceeding this value, the consensus layer issuance rewards obtained by validators who perform their duties normally and completely will be fully offset by the newly added burn deduction. It should be added that 60.25 million ETH is a fixed value that the proposal intends to write into the protocol at the hard fork.
There are two points that are easily misinterpreted here:
First, 50% is not a staking cap, nor is it a target staking rate. Validators can still continue to join; the proposal only hopes that the market will stop growing on its own before the returns are insufficient to cover liquidity, operational, slashing, and regulatory risks.
Second, the so-called "returns going to zero" only refers to the net issuance rewards on the consensus layer. Execution layer income such as priority fees and MEV is not affected by this proposal.
Net consensus layer returns under the current issuance curve and the EIP-8363 curve
According to the proposed curve, the annual consensus layer issuance will peak at around a staking rate of 19.8%, and then decline as the staking rate increases. Based on the current staking rate of about 33%, if the curve were fully implemented at the fork, the consensus layer yield would drop from about 2.6% to about 1.2%.
Annual issuance under the current issuance curve and the EIP-8363 curve
To avoid a sudden halving of returns, the proposal designs an 18-month transition period: upon activation, the base reward factor is temporarily increased from 64 to 128, and then gradually reduced back to 64 over 65 steps, each step lasting approximately 8.6 days. Therefore, the net returns at the initial stage of activation will be close to the current level, and then gradually decline. However, the curve that "no longer provides consensus layer issuance incentives after 50%" takes effect from the first day of activation and does not wait for 18 months.
Currently, this proposal is still an unmerged Core EIP draft, in the editorial review and consensus evaluation stage. The authors have separately submitted PR #12087, hoping to list it as Proposed for Inclusion in the Hegotá upgrade, i.e., "proposed for discussion". This PR is also not yet merged, and the current official Hegotá Meta EIP does not include it.
Ethereum core developers plan to discuss the Hegotá proposal deadline matters at the 184th ACDC meeting on August 6. Even if it enters Proposed for Inclusion, it does not mean it is confirmed for implementation; it still needs to go through developer evaluation, client implementation, testing, and Scheduled for Inclusion stages.
Community reaction is clearly negative
Jérôme de Tychey, one of the authors of EIP-8363, believes this is a "minimal, market-driven" change. He also stated in a forum response that the issuance debate has been ongoing since 2023, and this proposal merely opens a formal feedback window, not confirming inclusion.
He also warned that if the validator entry remains fully loaded and exits are few, by early 2028, the staked amount could exceed 70 million ETH, accounting for more than 55% of the supply; reversing at that point could cause larger exit scale and market disruption.
Those supporting the reduction of issuance have three main reasons:
- Ethereum may be paying too high a cost for economic security that is already sufficient;
- Unstaked holders are continuously diluted, forced to choose between "bearing dilution" and "taking staking risks";
- LSTs, ETFs, and custodial services continuously reduce staking friction, potentially allowing a few intermediaries to control large amounts of ETH and validation power simultaneously.
But currently, the opposing voices in public reactions are more concentrated.
Aave founder Stani Kulechov believes that consensus layer staking yields changing with the staking rate and eventually approaching zero would weaken the cash flow predictability that institutions value when allocating ETH, and compress positive spread strategies such as ETH lending and LST loop staking.
Obol co-founder Oisín Kyne proposed that Ethereum's true security depends not only on how much ETH is staked, but also on whether validation power is sufficiently decentralized. If yields fall to extremely low levels, large institutions with low capital costs and low sensitivity to yields may be able to stay in the field long-term and squeeze out high-cost independent operators.
ether.fi CEO Mike Silagadze criticized the proposal for being submitted on the eve of the Hegotá deadline, leaving insufficient time for ecosystem developers to discuss beforehand; he worries that low yields will impact staking-related protocols and reduce institutional confidence in Ethereum's governance stability.
Ethereum community member Ryan Berckmans summarized that opponents include at least those who worry about who will run validators under zero yields, those who do not want to reduce staking yields, those who oppose modifying ETH's monetary policy again, and those who hope to avoid controversy escalating and disrupting ecosystem growth. He himself supports moderately reducing issuance, but opposes letting yields approach zero, and also believes the current proposal is too divisive for the community.
A relatively middle-ground view comes from ARK Invest research head Lorenzo Valente. He frames the debate from ETH's asset positioning. If one values ETH's "internet bond" attribute more, weakening staking yields would indeed damage the lending market and yield curve; if one values ETH more as a neutral currency and store of value, then the base yield from staking mainly comes from new issuance, at the cost of dilution for non-stakers. Reducing issuance means reducing this transfer of value from non-stakers to stakers and their leverage strategies.
Who benefits, who bears the pressure?
If this proposal passes, the first to be affected are solo stakers.
The 18-month transition period can spread out the yield decline, but it will not reduce fixed costs such as hardware, electricity, and maintenance. The proposal retains the existing offline penalty intensity while lowering net yields, so a single failure will take longer to be compensated by subsequent yields. The proposal itself estimates that at the current staking rate of about 33%, the time needed to compensate for downtime losses may increase to about 3.8 times the current level.
For large operators with backup power, remote disaster recovery, and 24/7 operations, this change is relatively easy to digest; for home validators, a few network outages or equipment failures could significantly erode annual returns.
Tax treatment may also amplify this gap. EIP-8363 points out that in some jurisdictions, it is unclear whether tax authorities will recognize income based on pre-deduction rewards. If the burned portion can only be recognized as a capital loss, solo stakers' after-tax income may be lower than the apparent net yield.
The impact will further transmit to LSTs. The base yield of products like stETH and rETH comes from the underlying validators. When consensus layer issuance declines, the yield gap between LSTs and native ETH will also narrow. Whether users are willing to bear smart contract, governance, custody, and depeg risks for a one or two percentage point yield will become a new pricing question.
Leveraged strategies relying on LST yields will feel pressure earlier. A common practice is to borrow ETH, buy or mint LST, then collateralize the LST to borrow more ETH. When staking yields gradually approach borrowing costs, the positive spread of such trades will gradually disappear, and leveraged positions may actively shrink. Aave, Morpho, Pendle, and products built around LST yields may face declining ETH borrowing demand, capital utilization, and liquidity.
The impact will ultimately fall on the entire DeFi interest rate system. Staking yield is an important base rate in the ETH-denominated market, and LST lending, fixed income, yield splitting, and leveraged loops are all priced around this benchmark.
Of course, LSTs will not lose all their uses. What may really change is the advantage of LSTs relative to native ETH.
Further upstream, staking income for ETFs, exchanges, custodians, and ETH treasury companies will also decline. For institutions that rely on staking yields to improve asset returns, ETH's predictable cash flow will weaken, and willingness to add new allocations may be affected. Aave founder Stani Kulechov therefore believes that this proposal will make it harder for institutions to evaluate ETH yields and weaken ETH's competitiveness relative to other yield-bearing assets.
The actual impact on institutions may not be the same. When base yields decline, high-cost participants may exit first, while the largest institutions least dependent on staking yields are more capable of staying. This is exactly why opponents worry about further centralization of validators.
For ordinary ETH holders, the direction of impact is relatively clear. The burned issuance does not go to a specific protocol or fund, but benefits all ETH holders by reducing dilution.
However, reduced issuance does not necessarily mean ETH will be deflationary, nor can it be inferred that prices will necessarily rise. The final supply change still depends on EIP-1559 fee burning, network usage, validator issuance, and market conditions. If lower yields simultaneously weaken institutional allocation, LST demand, and on-chain lending activity, demand-side changes may also offset some supply-side benefits.
