Ethereum Staking Rewards Proposal Seeks to Adjust Validator Incentives

Ethereum developers have proposed a new mechanism to adjust staking rewards as more ETH is staked. The proposal, called EIP-8361, would burn validator rewards and destroy excess ETH if half of the total supply is staked. This would prevent a situation where validators are incentivized to participate in the network solely for the rewards.

The current curve for staking rewards falls only with the square root of the staking ratio, keeping a floor near 1.5% even as more ETH is staked. Removing this floor would let the market settle where yield meets the risk premium that stakers demand, which the authors argue is below 50%. The proposal's co-author Jérôme de Tychey argues that the current rate of staking means that a worst-case scenario could put more than 70 million ETH at stake by January 2028, exceeding 55% of supply.

However, not everyone agrees with this proposal. Isidoros Passadis, Chief of Staking at Lido, has expressed concerns that the plan attempts to do too much at once and could price out expert node operators from the market. He also warned that the curve could produce a sustained equilibrium near 50% staked with zero nominal yield, which he called 'a death-knell for the security of the network.'