Original author: KarenZ, Foresight News
Intuitively, the more ETH staked, the higher the economic cost to attack the network.
However, an increase in the staking scale does not necessarily bring an equivalent gain in security; if the new stakes primarily flow to a few large service providers, the validator ecosystem might instead become more centralized.
On August 4th, Jérôme de Tychey, founder of EthCC, Justin Drake from the Ethereum Foundation, and four other researchers jointly submitted the "Tapered Issuance Burn" proposal. It attempts to install a "revenue downslope" for the continuously growing staking ratio, 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 released with the number EIP-8361, but as that number had already been assigned to another proposal, it was subsequently changed to EIP-8363. Although it is still in the early draft stage, it has rapidly become one of the most contentious topics in the Ethereum community.
What is this proposal actually trying to do?
Currently, Ethereum consensus-layer rewards decrease as the total amount staked increases. However, even if all ETH were staked, there still exists a theoretical lower bound of approximately 1.5% for the nominal consensus yield of an individual validator.
The authors of EIP-8363 argue that this means the protocol always provides positive incentives for more staking, without a real "stop button," which could drive ETH towards concentration among large custodians, exchanges, and staking derivatives.
Additionally, unstaked ETH is continuously diluted by new issuance. Liquid Staking Tokens (LSTs), because they come with yield, can more easily replace native ETH as collateral in DeFi and savings assets. The proposal authors hope to reduce this dilution pressure, allowing native ETH to become a more competitive neutral asset again.
The solution given by the proposal is not to prohibit new validators from entering, nor to rigidly lock the staking ratio at 50%, but to deduct and burn a portion of the validator's calculated reward after its normal calculation. The burn proportion depends on the total effective staked balance: calculated as "the ratio of the total effective staked balance to 60.25 million ETH raised to the power of 1.5," with an upper limit of 100%, i.e.:
60.25 million ETH is approximately half of the current total ETH supply. As the staked amount approaches this value, the validator's net consensus-layer profit gradually approaches zero; upon reaching or exceeding this value, the consensus-layer issuance rewards earned by normally, fully performing validators will be completely offset by the new burn deductions. It should be added that 60.25 million ETH is a fixed value proposed to be written into the protocol at the hard fork.
There are two points easily misunderstood here:
First, 50% is not a staking cap, nor a target staking ratio. Validators can still continue to join; the proposal merely hopes the market will stop growing on its own before the reward is insufficient to cover liquidity, operational, slashing, and regulatory risks.
Second, the so-called "reward reaching zero" refers only to the net consensus-layer issuance reward. Execution-layer income such as priority fees and MEV is not affected by this proposal.
Net consensus-layer profit under the current issuance curve and the EIP-8363 curve
According to the proposal's curve, the annual consensus-layer issuance would peak near a staking ratio of about 19.8%, then decline as the staking ratio increases. Estimating with the current staking ratio of about 33%, if this curve were fully implemented at the fork, the consensus-layer yield would decrease 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 rewards, the proposal designs 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. Therefore, the initial net profit upon activation would be close to current levels, then gradually decline. However, the rule of "providing no consensus-layer issuance incentive after 50%" takes effect from the first day of activation; it does not wait for 18 months.
Currently, this proposal is still an unmerged Core EIP draft, in the editing review and consensus assessment stage. The authors have separately submitted PR #12087, hoping to have it listed as Proposed for Inclusion for the Hegotá upgrade. This PR is also not yet merged; the current formal Hegotá Meta EIP does not include it.
Ethereum core developers plan to discuss Hegotá proposal cut-off items at the 184th ACDC meeting on August 6th. Even if it enters Proposed for Inclusion, it does not guarantee implementation; it would still need to go through subsequent stages of developer assessment, client implementation, testing, and Scheduled for Inclusion.
Community reaction is clearly negative
Jérôme de Tychey, one of the EIP-8363 authors, believes this is a "minimalist, market-driven" change. He also stated in a forum response that the issuance debate started back in 2023, and this proposal merely opens a formal feedback window; it does not equate to being confirmed for inclusion.
He also warned that if validator entries remain continuously full and exits are few, the staked amount could exceed 70 million ETH by early 2028, accounting for over 55% of the supply; reversing course then could lead to larger exit volumes and market disruptions.
The side supporting reduced issuance mainly cites three reasons:
- Ethereum may be paying too high a cost for economic security that is already sufficiently abundant;
- Unstaked holders are continuously diluted, forced to choose between "bearing dilution" and "undertaking staking risk";
- LSTs, ETFs, and custodial services continuously lower staking friction, potentially ultimately allowing a few intermediaries to simultaneously control large amounts of ETH and validation rights.
However, opposition voices are more concentrated in the current public reaction.
Aave founder Stani Kulechov believes that consensus-layer staking rewards varying with the staking ratio and ultimately approaching zero would undermine the cash flow predictability valued by institutions when allocating ETH, and compress positive interest rate strategies like ETH lending and LST loop staking.
Obol co-founder Oisín Kyne points out that Ethereum's true security depends not only on how much ETH is staked, but also on whether the validation power is sufficiently decentralized. If rewards drop to extremely low levels, large institutions with low capital costs and low sensitivity to yield might have the ability to stay in the game long-term and squeeze out high-cost independent operators.
ether.fi CEO Mike Silagadze criticized the proposal for being submitted just before the Hegotá deadline, leaving insufficient lead time for ecosystem developers to discuss it; 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 at least include those worried about who will run validators under zero rewards, those unwilling to reduce staking yields, those opposed to modifying ETH monetary policy again, and those hoping to avoid escalating controversy disrupting ecosystem growth. He personally supports moderately reducing issuance but opposes letting rewards trend all the way to zero, also believing the current proposal is too divisive for the community.
A relatively neutral view comes from ARK Invest research director Lorenzo Valente. He frames this debate from the perspective of ETH's asset positioning. If one emphasizes ETH's "internet bond" attributes more, weakening staking yield indeed damages the lending market and yield curve; if one emphasizes ETH as a neutral currency and store of value more, then the base yield obtained through loop staking mainly comes from protocol issuance, at the cost of unstaked holders being diluted. Reducing issuance means reducing this transfer of yield from unstaked holders to stakers and their leverage strategies.
Who Benefits and Who Bears the Pressure?
If this proposal passes, Solo Stakers would be affected first.
The 18-month transition period spreads out the reward decline but does not reduce fixed costs like hardware, electricity, and operation/maintenance. The proposal maintains the current offline penalty intensity while lowering net rewards, so it would take longer for a single fault to be compensated by subsequent rewards. The proposal itself estimates that at the current ~33% staking ratio, the time needed to compensate for downtime losses could increase to about 3.8 times the current duration.
For large operators with backup power, disaster recovery, and 24/7 operations, such changes are relatively easier to absorb; for home validators, a few internet outages or device failures could significantly erode annual returns.
Tax treatment could also amplify this disparity. The EIP-8363 proposal notes that in some jurisdictions, it's currently unclear whether tax authorities would recognize income based on the pre-deduction reward. If the burned portion can only be recognized as a capital loss, a solo staker's post-tax earnings could be lower than the apparent net reward.
The impact would further transmit to LSTs. The base yield for products like stETH and rETH comes from the underlying validators; when consensus-layer issuance decreases, the yield gap between LSTs and native ETH would also narrow. Whether users are still willing to bear smart contract, governance, custody, and de-pegging risks for one or two percentage points of yield would become a new pricing question.
Loop strategies relying on LST yield would feel pressure sooner. The common approach is to borrow ETH, buy or mint LSTs, then use the LSTs as collateral to borrow more ETH. As staking yield gradually approaches borrowing costs, the positive interest rate spread of such trades would gradually disappear, and leveraged positions might contract voluntarily. Aave, Morpho, Pendle, and products built around LST yield might consequently face decreased ETH borrowing demand, capital utilization rates, and liquidity.
The impact would ultimately affect the entire DeFi interest rate system. Staking yield is an important base rate for ETH-denominated markets; LST lending, fixed income, yield splitting, and loop leverage are all priced around this benchmark.
Of course, LSTs would not lose all their utility because of this. What might truly change is LSTs' advantage relative to native ETH.
Looking further upstream, the staking income of ETFs, exchanges, custodians, and ETH treasury companies would also decline. For institutions relying on staking yield to enhance asset returns, ETH's predictable cash flow would weaken, potentially affecting their willingness for new allocations. Aave founder Stani Kulechov therefore believes this proposal would make it harder for institutions to evaluate ETH's yield and weaken ETH's competitiveness relative to other yield-bearing assets.
The actual impact on institutions may not be uniform. When base yields fall, high-cost participants might exit first, while the largest institutions least dependent on staking yield might instead be more capable of staying. This is precisely the reason opponents fear further validator centralization.
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 collectively by reducing dilution.
However, reduced issuance does not mean ETH will necessarily become deflationary, nor can one deduce that the price will necessarily rise. The final 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 changes could also offset some of the supply-side benefits.
