Ethereum Proposes Tapered Staking Rewards Cap at 50% Supply

Ethereum developers have proposed EIP-8361, a new protocol update that would limit staking rewards to zero once staked ETH reaches 50% of total supply. This cap is intended to curb over-staking and mitigate centralization risks by discouraging unnecessary staking.

The proposal uses a tapered issuance burn mechanism, which would gradually reduce new validator rewards as the staking ratio increases. When staked ETH hits approximately 60.25 million ETH, all newly issued rewards would be fully burned. This reduction in rewards would be phased in over an 18-month period to minimize market disruption.

The Ethereum Foundation researcher Justin Drake and other core developers introduced EIP-8361 to address concerns about the rapid growth of staking on the network. They argue that high staking participation can lead to centralization, as large institutional players and liquid staking protocols accumulate significant control. By introducing a natural economic brake, the proposal aims to keep staking participation balanced and reduce the risk of the network becoming overly concentrated.

The 18-month transition period is intended to ease the shift for institutional participants, who rely on stable yields. However, Aave founder Stani Kulechov has expressed concerns that such a cap could prompt institutional investors to shift their focus to other blockchain networks.