Author: Zach Pandl, Head of Research, Grayscale
Compiled by: Deep Tide TechFlow
Deep Tide Guide: Zach Pandl, Head of Research at Grayscale, writes that Ethereum's current staking reward model faces two structural problems: L2 scaling is reducing token burn and increasing net issuance; staking friction is approaching zero, potentially locking nearly all ETH into staking. The community is discussing implementing a cap on staking rewards, which Grayscale believes would be beneficial for ETH's price in the long term.
The Ethereum community is considering revising the network's staking reward model, with the core idea being to only incentivize staking up to a certain ratio, with no additional rewards beyond that. If implemented, nominal returns for stakers would decrease. However, Grayscale argues this would be positive for ETH's price long-term for two reasons: controlling ETH inflation and strengthening ETH's narrative as a store-of-value asset.
The discussion for this reform is driven by two overlapping issues.
Diminished Token Burn, Rising Net Issuance
ETH's supply depends on the difference between new issuance and token burn. Currently, Ethereum L1 burns all base transaction fees. High fees mean more ETH is burned, suppressing supply growth.
Changes over the past few years have disrupted this balance. As more activity migrates to L2 networks, L1 transaction fees and token burns decrease, leading to a rise in net issuance.
Caption: Exhibit 1 – Drivers of ETH supply changes since PoS. After the Dencun upgrade, cumulative burn (green line) flattened, while cumulative issuance (orange line) continued to rise, causing ETH's net supply change (dark line) to turn positive from negative. Source: Coin Metrics, Grayscale Investments, data as of May 9, 2026
Compounding this issue, Ethereum L1 is now actively choosing to scale to compete with high-throughput chains like Solana. Pandl states directly: L1 transaction fees are likely to remain low for the foreseeable future, token burns will continue to decline, and net supply growth will expand further.
Staking Friction Costs Are Almost Zero
When Ethereum first launched staking, users could not withdraw assets; staked ETH was locked, illiquid, and thus carried a risk premium. Now that withdrawals are enabled, liquidity has greatly improved, and that risk premium has evaporated.
More critically, Liquid Staking Tokens (LSTs), Exchange-Traded Products (ETPs), and corporate ETH treasuries have entered the staking arena. The marginal cost of staking ETH is now close to zero. As long as the network continues to provide marginal rewards to stakers, nearly all ETH could eventually end up staked.
Staking is a necessary condition for the Ethereum protocol to function properly, but an excessively high staking ratio can be counterproductive.
Two risks. First, unnecessary dilution. Rising net issuance without substantially improving network security is like a country overspending on defense with no benefit to national security. Second, the tail risk of centralization where a few institutions dominate staking activity. This possibility exists due to network effects among service providers.
Implementing a Capped Staking Reward Curve
One proposed solution is to transition to a reward model that only incentivizes staking up to a certain level.
Caption: Exhibit 2 – Potential alternative staking reward curves for Ethereum. Under the current model (dark line), annualized issuance grows linearly with stake; Options A/B/C set caps or inflection points at different staking levels, causing issuance to flatten or even decline after the staking ratio exceeds a certain threshold. Source: Coin Metrics, Grayscale Investments, data as of April 26, 2026, options are hypothetical.
Grayscale believes such a change would be favorable for ETH's market value in the long term. ETH is a functionally useful commodity, not a financial claim like stocks or bonds, and should not be priced based solely on cash flows. Updating the staking reward model would reduce supply growth and enhance ETH's scarcity. For commodities, production cuts are price-positive; the same logic applies to ETH.
Reducing network tail risks, controlling long-term inflation, and it could also boost demand for unstaked ETH as a digital store-of-value asset.
There's another easily overlooked perspective: the impact of ETH's price volatility on investment returns far outweighs staking rewards. The current ~3% annualized staking yield is roughly equivalent to ETH's daily price volatility (annualized volatility over the past 360 days is ~60%, implying a daily volatility of ~3%).
Conclusion: Ethereum may revise its staking reward model to control long-term supply growth and reduce specific tail risks. If implemented, Grayscale believes this would be bullish for ETH's price.
