Written by: KarenZ, Foresight News

Intuitively, the more ETH staked, the higher the economic cost of attacking the network.

However, an increase in staking does not necessarily lead to a proportional gain in security; if new stakes primarily flow to a few large service providers, the validator ecosystem might become more centralized instead.

On August 4, EthCC founder Jérôme de Tychey, Ethereum Foundation's Justin Drake, and four other researchers jointly submitted the "Tapered Issuance Burn" proposal, attempting to install a "yield downhill" for the continuously increasing staking rate, and when the staking volume approaches 50% of the total ETH supply, the consensus layer issuance rewards received by validators will be completely offset.

This proposal was initially released under the number EIP-8361, but since that number was already assigned to another proposal, it was later changed to EIP-8363. Although it is still in the early draft phase, it has quickly become one of the most controversial topics in the Ethereum community.

What does this proposal aim to achieve?

Currently, the Ethereum consensus layer rewards decline as the total staked amount increases, but even if all ETH participates in staking, the nominal consensus yield for individual validators still has a theoretical lower limit of about 1.5%.

The authors of EIP-8363 believe that this means the protocol always provides positive incentives for more staking, without a real "stop button," possibly pushing ETH to concentrate in large custodians, exchanges, and staking derivatives.

Additionally, unstaked ETH will continually be diluted by new issuance. LSTs, with their inherent yields, are more likely to replace native ETH as DeFi collateral and savings assets. The proposal's authors hope to reduce this dilution pressure, making native ETH a more competitive neutral asset again.

The method proposed is not to prohibit new validators from entering nor to hard lock the staking rate at 50%, but rather to calculate the validator rewards normally and then deduct and burn a portion of them. The burn ratio depends on the network's effective staking balance: calculated as "the effective staking balance of the whole network to 60.25 million ETH ratio raised to the power of 1.5," with 100% as the upper limit, that is:

60.25 million ETH is approximately half of the current total ETH supply. As the staking amount approaches this figure, the net consensus rewards for validators will gradually approach zero; once this value is reached or exceeded, the consensus layer issuance rewards received by normally and fully performing validators will be entirely offset by the new burn deductions. It should be noted that 60.25 million ETH is a fixed value proposed for inclusion in the protocol during the hard fork.

There are two points that are easy to misinterpret:

First, 50% is neither a staking cap nor a target staking rate. Validators can continue to join; the proposal merely hopes the market will self-stop growing before the rewards are insufficient to cover liquidity, operations, penalties, and regulatory risks.

Second, "zero yield" only refers to the net issuance rewards of the consensus layer. Execution layer income like priority fees and MEV is not impacted by this proposal.

Current issuance curve and net consensus layer yield under EIP-8363

According to the proposal’s curve, the annual consensus layer issuance will peak near a staking rate of about 19.8%, and will then decline as the staking rate increases. With the current staking rate of about 33%, if this curve is fully implemented at the fork, the consensus layer yield will drop from about 2.6% to about 1.2%.

Current issuance curve and annual issuance volume under EIP-8363

To avoid a sudden halving of yields, the proposal designs an 18-month transition period: when activated, the base reward factor will temporarily increase from 64 to 128, then gradually decrease back to 64 over 65 steps, with each step lasting about 8.6 days. Thus, the net yields in the early activation phase will be close to current levels before gradually declining. However, the "no consensus layer issuance incentive after 50%" curve will take effect from the first day of activation and will not wait for 18 months.

Currently, this proposal is still an unmerged Core EIP draft, in the editing review and consensus assessment phase. The authors submitted PR #12087, hoping to list it as Proposed for Inclusion for the Hegotá upgrade, that is, "proposed for discussion." This PR has also not yet been merged, and it is not currently included in the official Hegotá Meta EIP.

The Ethereum core developers plan to discuss the Hegotá proposal's deadline at the 184th ACDC meeting on August 6. Even if it enters Proposed for Inclusion, it does not mean implementation is confirmed, as it still needs to go through developer assessments, client implementations, testing, and Scheduled for Inclusion stages.

Community response is significantly negative

Jérôme de Tychey, one of the authors of EIP-8363, believes this is a "minimizing, market-driven" change. He also stated in a forum response that the issuance debate has started since 2023, and this proposal merely opens a formal feedback window, which does not guarantee inclusion.

He warned that if validator entry continues to be saturated with few exits, by early 2028, the staking volume could exceed 70 million ETH, accounting for over 55% of the total supply; by then, reversing this trend may lead to larger exit scales and market disturbances.

The support for reducing issuance is mainly based on three reasons:

• Ethereum may be paying too high a cost for already sufficiently abundant economic security;
• Unstaked holders are continuously diluted, forced to choose between "bearing dilution" and "taking on staking risk";
• LSTs, ETFs, and custodial services are continually reducing staking friction, which may eventually allow a few intermediaries to control a large amount of ETH and validator rights simultaneously.

However, currently, the public responses are more concentrated in opposition.

Aave founder Stani Kulechov believes that the decline of consensus layer staking yields with increasing staking rates, ultimately approaching zero, will weaken the cash flow predictability when institutions allocate ETH, and constrain positive spread strategies such as ETH borrowing, LST circular staking, etc.

Obol co-founder Oisín Kyne pointed out that Ethereum's true security does not only depend on how much ETH is staked but also on how well the validation rights are decentralized. If yields drop to extremely low levels, large institutions with low capital costs and insensitivity to yields may remain in the market long-term, pushing out high-cost independent operators.

ether.fi CEO Mike Silagadze criticized the proposal's submission just before the Hegotá deadline, leaving insufficient discussion time for ecosystem developers; he is concerned that low yields will impact staking-related protocols and reduce institutional confidence in Ethereum's governance stability.

Ethereum community member Ryan Berckmans summarized that the opposition includes at least those worried about who will run validators when yields are zero, those unwilling to reduce staking yields, those opposed to further modifications of ETH monetary policy, and those who want to avoid the escalation of disputes disrupting ecosystem growth. He personally supports a moderate reduction in issuance but opposes allowing yields to approach zero and believes the current proposal is too divisive for the community.

A relatively middle-ground viewpoint comes from ARK Invest Research Director Lorenzo Valente. He approached this debate from the asset positioning of ETH. If ETH's "internet bond" attributes are prioritized, reducing staking yields will indeed damage the lending market and yield curves; if ETH is viewed more as a neutral currency and store of value, then the base yields obtained from circular staking mainly come from the protocol's new issuance, which comes at the cost of diluting unstaked holders. Reducing issuance means less of this yield transfer, which is borne by unstaked holders and flows to stakers and their leverage strategies.

Who benefits, who is under pressure?

If this proposal passes, the first to be impacted will be Solo Stakers.

The 18-month transition period can spread out the decline in yields but will not reduce fixed costs such as hardware, electricity, and operational maintenance. The proposal retains the existing offline penalty intensity while suppressing net yields, meaning that a single failure will take longer to recover through subsequent earnings. The proposal itself estimates that, at the current staking rate of about 33%, the time required to recover from downtime losses could increase to about 3.8 times the current.

For large operators with backup power, remote disaster recovery, and round-the-clock operation, this change is relatively easy to absorb; for home validators, a few network outages or equipment failures could significantly erode annual returns.

Tax treatment may also amplify this disparity. The EIP-8363 proposal notes that in some jurisdictions, there is currently no clear answer on whether tax authorities will confirm income based on rewards before deductions. If the burned portion can only be recognized as a capital loss, the post-tax income for solo stakers may be lower than the apparent net yield.

The impact will further extend to LSTs. Products like stETH and rETH derive their base yields from underlying validators, and as consensus layer issuance decreases, the yield gap between LSTs and native ETH will also narrow. Users may reconsider if they still want to bear risks associated with smart contracts, governance, custody, and decoupling for just a percentage point or two of yield, which will become a new pricing issue.

Circular strategies dependent on LST yields will feel the pressure sooner. A common practice is to borrow ETH, buy or mint LSTs, and then lend out more ETH against staked LSTs. As staking yields approach borrowing costs, the positive spreads in such transactions will gradually disappear, and leveraged positions may contract proactively. Products built around Aave, Morpho, Pendle, and LST yields could face decreased ETH borrowing demand, capital utilization, and liquidity as a result.

The overall impact will fall on the entire DeFi interest rate system. Staking yields are an important fundamental interest rate in ETH-denominated markets, with LST lending, fixed income, yield splitting, and circular leverage all priced around this benchmark.

Of course, LSTs will not lose all their use. What may truly change is LST’s relative advantage over native ETH.

Looking upstream, the staking income for ETFs, exchanges, custodians, and ETH treasury companies will also decline. For institutions relying on staking income to improve asset returns, the predictability of ETH's cash flows will weaken, potentially affecting their willingness to allocate more. Aave founder Stani Kulechov believes this proposal will increase the difficulty for institutions to assess ETH yields and weaken ETH's competitiveness relative to other income-generating assets.

The actual impact on institutions may not be uniform. When base yields decline, high-cost participants may exit first, while large institutions that least rely on staking yields may actually have more capacity to remain. This is precisely why opponents are worried about further centralization of validators.

For ordinary ETH holders, the direction of impact is relatively clear. The burned issuance will not go into a specific protocol or fund but will benefit all ETH holders by reducing dilution collectively.

However, reducing issuance does not mean that ETH will necessarily deflate, nor can it be inferred that prices will inevitably rise. Ultimately, changes in supply still depend 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 activities, changes on the demand side may also offset some of the supply-side gains.

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