EIP-8363 Sparks Debate in Ethereum Community Over Staking Incentives

Original author: KarenZ, Foresight News

Intuitively, the more ETH staked, the higher the economic cost of attacking the network.

However, increasing the scale of staking does not necessarily lead to a proportional increase in security; if new staking primarily flows to a few large service providers, the validator ecosystem may become even more centralized.

On August 4, six researchers, including EthCC founder Jérôme de Tychey and Ethereum Foundation’s Justin Drake, jointly submitted the "Tapered Issuance Burn" proposal, aiming to install a "downward yield slope" for the rising staking rate, such that when staking volume approaches 50% of ETH’s total supply, the consensus-layer issuance rewards for validators will be fully offset.

This proposal was initially released under the number EIP-8361, but was later changed to EIP-8363 after the original number was assigned to another proposal. Although it is still in an early draft stage, it has rapidly become one of the most contentious topics in the Ethereum community.

Currently, Ethereum consensus layer rewards decrease as the total amount of staked ETH increases, but even if all ETH were staked, the nominal consensus yield for individual validators would still have a theoretical minimum of approximately 1.5%.

The author of EIP-8363 believes this means the protocol continuously provides positive incentives for more staking, with no real "off switch," potentially driving ETH toward centralized custodians, exchanges, and staking derivatives.

Additionally, un-staked ETH continues to be diluted by ongoing issuance. LSTs, due to their built-in yield, are more likely to replace native ETH as collateral and savings assets in DeFi. The proposal author aims to reduce this dilution pressure and restore native ETH as a more competitive neutral asset.

The proposed approach does not prohibit new validators from joining, nor does it rigidly lock the staking rate at 50%. Instead, after calculating validator rewards normally, a portion of those rewards is deducted and burned. The burn rate is determined by the network's effective staked balance: calculated as the 1.5th power of the ratio between the network's effective staked balance and 60.25 million ETH, with a maximum of 100%:

60.25 million ETH is approximately half of the current total ETH supply. As staking approaches this level, the net consensus-layer rewards for validators gradually trend toward zero; at or above this level, the consensus-layer issuance rewards earned by properly functioning validators will be fully offset by the newly burned ETH. It should be noted that 60.25 million ETH is the fixed value proposed to be written into the protocol at the time of the hard fork.

There are two areas that are easily misunderstood:

First, 50% is not a staking cap or a target staking rate. Validators can still continue to join; the proposal merely aims for the market to self-limit growth before rewards become insufficient to cover liquidity, operational, slashing, and regulatory risks.

Second, the so-called "zero yield" refers only to the net issuance reward at the consensus layer. Execution layer revenues, such as priority fees and MEV, are not affected by this proposal.

Current issuance curve versus consensus layer net earnings under EIP-8363

According to the proposal curve, annual consensus layer issuance will peak at a staking rate of approximately 19.8%, then decline as the staking rate increases. With the current staking rate of about 33%, if the curve is fully implemented at the fork, the consensus layer yield would decrease from approximately 2.6% to about 1.2%.

Current issuance curve versus annual issuance under EIP-8363

To prevent a sudden halving of rewards, the proposal introduces an 18-month transition period: upon activation, the base reward factor will be temporarily increased from 64 to 128, then gradually reduced back to 64 over 65 steps, with each step lasting approximately 8.6 days. As a result, net rewards at the start of activation will be close to current levels and decline gradually. However, the curve stating “no consensus layer issuance incentives after 50%” takes effect immediately upon activation and does not wait for the 18-month period.

Currently, this proposal remains an unmerged Core EIP draft, in the stages of editorial review and consensus evaluation. The author has separately submitted PR #12087, seeking to list it as "Proposed for Inclusion" in the Hegotá upgrade. This PR has also not yet been merged and is not yet included in the official Hegotá Meta EIP.

Ethereum core developers plan to discuss the Hegotá proposal deadline at the 184th ACDC meeting on August 6. Even if a proposal is marked as "Proposed for Inclusion," it does not guarantee implementation; it still requires further evaluation by developers, client implementation, testing, and eventual scheduling for inclusion.

One of the EIP-8363 authors, Jérôme de Tychey, considers this a "minimal, market-driven" change. He also stated in a forum response that the debate over issuance began in 2023, and this proposal merely opens a formal feedback window—it does not equate to final inclusion.

He also warned that if validator entry remains saturated and exits remain low, staked ETH could exceed 70 million by early 2028, accounting for more than 55% of the supply; reversing this trend later could lead to even larger exit volumes and greater market disruption.

The main arguments supporting the party that advocates for reducing issuance are:

• Ethereum may be paying too high a cost for economic security that is already sufficient;
• Unstaked holders are continuously diluted, forcing them to choose between "accepting dilution" and "assuming staking risk";
• LSTs, ETFs, and custodial services continuously reduce staking friction, potentially enabling a small number of intermediaries to control large amounts of ETH and validation power.

However, the opposition in current public reactions is more concentrated.

Aave founder Stani Kulechov believes that consensus-layer staking yields, which vary with the staking rate and eventually approach zero, will undermine the cash flow predictability that institutions value when allocating to ETH, and compress arbitrage strategies such as ETH lending and LST circular staking.

Obol co-founder Oisín Kyne argues that Ethereum’s true security depends not only on how much ETH is staked, but also on whether staking rights are sufficiently decentralized. If yields drop to extremely low levels, large institutions with low capital costs and low sensitivity to yields may be able to remain entrenched long-term, pushing out higher-cost independent operators.

ether.fi CEO Mike Silagadze criticized the proposal for being submitted just before the Hegotá deadline, leaving insufficient time for prior discussion among ecosystem developers; he expressed concern that low yields could negatively impact staking-related protocols and undermine institutional confidence in Ethereum's governance stability.

Ethereum community member Ryan Berckmans summarized that opponents include those concerned about who will run validators if yields drop to zero, those unwilling to reduce staking rewards, those opposed to further changes to ETH’s monetary policy, and those seeking to avoid escalating controversy that could disrupt ecosystem growth. He supports a modest reduction in issuance but opposes driving yields all the way toward zero, and believes the current proposal is overly divisive within the community.

A middle-ground perspective comes from Lorenzo Valente, Research Director at ARK Invest. He approaches this debate by examining ETH’s asset positioning. If ETH is primarily viewed as an “internet bond,” reducing staking rewards could harm the lending market and the yield curve. However, if ETH is seen more as a neutral currency and store of value, then the base yield generated through circulating staking primarily stems from protocol issuance, at the cost of diluting non-stakers; reducing issuance means diminishing this transfer of yield—from non-stakers to stakers and their leveraged strategies.

If this proposal is approved, Solo Stakers will be the first affected.

An 18-month transition period can spread out the reduction in rewards without lowering fixed costs such as hardware, electricity, and operations. The proposal maintains the current offline penalty intensity while reducing net yields, meaning it will take longer to recover from a single outage through subsequent rewards. The proposal estimates that, at the current staking rate of approximately 33%, the time required to recover from downtime could increase to about 3.8 times the current duration.

For large operators with backup power, off-site disaster recovery, and 24/7 operations, this change is relatively easy to absorb; for home validators, a few network outages or equipment failures could significantly erode annual returns.

Tax treatment may also amplify this gap. The EIP-8363 proposal notes that in some jurisdictions, it is currently unclear whether tax authorities will recognize rewards as income before deductions. If the burned portion can only be classified as a capital loss, the after-tax income of a solo staker may be lower than the apparent net gain.

The impact will further propagate to LSTs. The base yields of products like stETH and rETH come from underlying validators; as consensus layer issuance decreases, the yield gap between LSTs and native ETH will narrow. Whether users are still willing to bear the risks of smart contracts, governance, custody, and de-pegging for a one or two percentage point yield advantage will become a new pricing question.

Strategies reliant on LST yields will feel pressure earlier. The common practice involves borrowing ETH, buying or minting LST, and then using the LST as collateral to borrow more ETH. As staking yields gradually approach borrowing costs, the positive spread on these trades diminishes, potentially leading to voluntary deleveraging. Platforms such as Aave, Morpho, Pendle, and other products built around LST yields may therefore face reduced demand for ETH borrowing, lower capital utilization, and decreased liquidity.

The impact will ultimately affect the entire DeFi interest rate system. Staking yields serve as a foundational interest rate in the ETH-denominated market, with LST lending, fixed income, yield splitting, and leveraged recycling all pricing around this benchmark.

Of course, LSTs will not lose all their utility. What may truly change is the relative advantage of LSTs over native ETH.

Looking further upstream, staking revenues for ETFs, exchanges, custodians, and ETH treasury firms will also decline. For institutions that rely on staking yields to enhance asset returns, ETH’s predictable cash flow will weaken, potentially affecting their willingness to allocate additional capital. Aave founder Stani Kulechov therefore believes this proposal will make it more difficult for institutions to evaluate ETH’s yield and undermine ETH’s competitiveness relative to other interest-bearing assets.

The actual impact on institutions may not be the same. When underlying yields decline, high-cost participants may exit first, while large institutions least dependent on staking rewards are better positioned to stay. This is precisely why opponents fear further centralization among validators.

For ordinary ETH holders, the impact is relatively clear: the burned issuance does not go to any protocol or fund, but instead benefits all ETH holders collectively by reducing dilution.

However, reduced issuance does not necessarily mean ETH will become deflationary, nor does it guarantee a price increase. The net supply change still depends on EIP-1559 fee burns, network usage, validator issuance, and market conditions. If lower yields simultaneously weaken institutional allocation, LST demand, and on-chain lending activity, demand-side shifts could offset some of the supply-side benefits.