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A group of Ethereum blockchain developers has proposed reducing the emission rate of Ether coins if staking demand continues to grow. This is the first such proposal after several months of public criticism of Ethereum's ($ETH) economic model, which, according to experts, is putting pressure on the asset's price. This also coincides with the developers' plans for a full-scale blockchain overhaul.
The potential network upgrade option involves completely burning all new $ETH if the amount of coins in staking exceeds 50% of the total emission. This solution would potentially increase the shortage of $ETH on the open market, limiting further dilution of existing holders' share.
The essence of the problem the developers want to solve is that before 2021, validators (network operators) received all fees in full, but then Ethereum implemented a mechanism for partially burning fees. This model was positioned as deflationary. It was assumed that with high network activity, the volume of burned $ETH could exceed the issuance of new coins through staking.
However, technical changes in recent years have led to Ethereum fees decreasing by tens of times. This has made transactions cheaper and simultaneously reduced the rate of coin burning. It turned out that the emission rate of new $ETH continues to remain at around 2%, and the implemented burning mechanism did not cover the amount of $ETH being issued.
And all this is happening against the backdrop of a lack of positive price dynamics for $ETH over a five-year period. From the 2021 peak, the price of Ether has fallen by more than 60% to below $1.9 thousand. For comparison, the price of Bitcoin has remained virtually unchanged over the same time.
Thus, the developers propose essentially depriving validators of a significant portion of their income upon reaching a certain amount of $ETH in staking. And although validators will retain income from fees, according to the proposal, this is estimated to be only a tenth of their current income. The other nine parts will go to burning.
The problem, according to the developers, is that staking will never stop diluting the emission. And even if all $ETH is staked, the current mechanism assumes that the yield will remain at a level slightly below 2%. And it is precisely this mechanism that makes Ether less secure in the long term due to the concentration of capital among large players.
Criticism of the $ETH Burning Proposal
The proposal has divided market participants and Ethereum developers. The founder of the largest crypto lending project Aave, Stani Kulechov, wrote an extensive comment on the proposal, stating that reducing staking yields could create more problems than it solves.
Kulechov pointed out that many borrowers on Aave use borrowed $ETH for staking, and the obtained yield helps offset the cost of the loan. In his opinion, reducing the yield could make such strategies unattractive and reduce the demand for $ETH in lending protocols in principle. He believes that reducing the yield will lead to the departure of private validators, as a result of which staking will only become more concentrated among large services.
The founder of the liquid staking protocol Ether.fi, Mike Silagadze, opposed "major changes to the network's economy," assessing the negative prospects "for the entire decentralized finance (DeFi) market."
Silagadze added that the change "will obviously displace retail stakers, leaving the sector to large centralized structures." According to him, "seven out of the ten largest DeFi protocols" will face capital outflows.
Regarding the impact of such updates on Ethereum's price, Silagadze noted that "people who borrow $ETH do not sell it." He claims that such a proposal would force participants to abandon staking and return tens of billions of dollars worth of $ETH to the market.
Other Examples in the Crypto Market
Ethereum is not the only major blockchain network whose developers are working on reducing the growth rate of token supply. Almost simultaneously, proposals SIMD-0550 and SIMD-0553 were published for Solana, which provide for accelerating the reduction of inflation and increasing the volume of $SOL token burning.
If approved, the daily burn could increase to approximately 7500–9000 $SOL, and the minimum inflation level of 1.5% would be reached in 2029 instead of 2032.
A few years ago, staking mechanisms were promoted as almost the only solution for modern blockchain projects. At that time, many criticized Bitcoin for its economic model, which adheres to a strict emission limit without internal yield mechanisms. Now, the developers of staking networks are essentially striving for something similar.
Why the Billion-Dollar Revenues of Crypto Projects Did Not Lead to the Growth of Their Tokens
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