Ethereum Staking Surges, How Will EIP-7514 Address the Staking Issue?

Ether Staking Volume Growing Rapidly

Although the staking withdrawal feature was introduced after the Ethereum Shapella upgrade, the total staked amount did not decrease. Currently, the Ethereum network has 898,110 active validators, staking a total of 28.8 million ETH, which accounts for 24% of the total Ethereum supply. This reflects the widespread adoption and trust in the PoS validation mechanism.

According to Ebunker, the annual inflation rate of Ethereum is -0.03%, while the annual staking yield in the past 7 days is approximately 5.04%. The deflationary trend and attractive staking rewards have instilled confidence in ETH holders regarding the long-term value of the Ethereum network, leading them to prefer earning passive income through staking. This trend is also in line with the growing stability and maturity of the Ethereum ecosystem.

Ethereum staking aims to enhance the security and stability of the network while reducing its environmental footprint, positioning the Ethereum blockchain development at the forefront of decentralized applications and enabling secure and transparent transactions in the digital realm. However, the unforeseen impact of the surge in staked amount during the development process has posed potential risks to the Ethereum network. As a result, Ethereum developers are considering EIP-7514, a proposal that will alter the future of Ethereum staking.

Risks of Excessive Staking in Ethereum

The major issue of excessive staking stems from the significant increase in validators, which puts pressure on the Ethereum network. As more participants engage in staking, the number of validators and their corresponding responsibilities continue to grow. This leads to increased communication, growth in stakeholders’ accounting (beacon chain), surge in traffic, network congestion, and longer transaction processing times.

With the rise in staked amount, the pressure on the consensus layer responsible for confirming transactions also exponentially increases. Although a high proportion of staked levels can enhance network security, the benefits to the network are weakened when staking amount surges in the short term.

As more ETH is staked, the rewards received by validators will be distributed among a larger number of participants, resulting in a decrease in staking rewards. However, the high profits from Miner Extractable Value (MEV) and the attractiveness of liquidity staking tokens will continue to stimulate additional staking growth. If this trend continues unrestricted, a higher proportion of ETH will be staked. Therefore, Ethereum itself must carefully assess this situation to ensure the durability and stability of the Ethereum network.

EIP-7514: How will it solve Ethereum’s staking problem?

EIP-7514 proposes to alleviate the rapid surge in ETH staking volume by changing the growth rate of validators. It proposes to convert it from the current exponential growth model to a controlled linear growth model by limiting the epoch churn limit.

Epoch churn limit is a setting that limits the number of validators that can join or leave the Ethereum network during a specific period (epoch). Currently, the number of nodes joining or exiting each epoch is 12, and will slowly increase as the total number of validators increases.

With the introduction of epoch limits, Ethereum will restrict the rate at which new validators can join the network from a fluctuating value (currently 12) to a fixed value of 8, thereby slowing down the surge in ETH staking. However, the total number of exits per epoch is not affected by this EIP and remains tied to the total number of validators (currently 12 per epoch).

The reason is not complicated. According to Dankrad Feist, a core Ethereum developer, ETH staking could reach 50% of the total supply by May 2024 and potentially near 100% by December 2024. While high staking levels theoretically enhance network security, rapidly reaching high proportions of staking in the short term could disrupt network balance and increase the burden on the consensus layer, as well as pose a risk of depleting the available ETH supply on-chain. If EIP-7514 is implemented, it will effectively prevent excessive growth in Ethereum staking.

EIP-7514 aims to hinder the expansion of the active validator set. Limiting the size of the validator set buys the Ethereum team time to develop long-term solutions for this issue. Controlling the size of the validator set is crucial for the future, considering factors such as Single Slot Finality (SSF) and P2P network traffic. This will ensure the Ethereum network remains healthy and continues to operate as planned, without impacting those already running validators.

EIP-7514 Impact on Ethereum

EIP-7514 does not immediately address the technical and financial issues posed by the surge in Ethereum staking. A fixed maximum churn limit limits the number of validators that can enter or leave the network during an epoch, thereby temporarily mitigating staking increases and buying time to research long-term solutions. Since the churn limit for validators leaving the network is still dynamic, it is not affected by this limit. This ensures efficient reward management and prevents long staking withdrawal queues.

Because the impact of staking growth was not fully anticipated when the staking mechanism was first introduced to the Ethereum network, the EIP-7514 proposal is only a temporary response. If a hard cap is placed on the validator churn limit, it will become more difficult for new validators to join each epoch, so it will take longer for the pledge amount to increase to a higher proportion. If the validator activation queue remains saturated and this setting does not affect staking demand, staking volume will still rise to very high levels in the long term.

However, EIP-7514 could give the Ethereum development team enough time to explore long-term solutions to the staking problem. At present, some potential long-term alternatives mainly include: appropriately reducing staking returns, implementing MEV destruction, weakening Lido’s monopoly by promoting the participation of more liquidity staking providers, and increasing the ETH required by each validator. Quantity etc. However, given that these solutions have not yet been tried and that blockchain technology is constantly changing and raising new questions, executing on these options without a thorough understanding of their implications could cause unpredictable second-order impacts.

Community reaction and discussion

EIP-7514 is one of the topics of community discussion during Ethereum’s 2024 Dencun upgrade. Currently, the Ethereum community has a mixed attitude towards EIP-7514.

On one hand, supporters believe that EIP-7514 is seen as a practical step to control the rapid growth of staking and alleviate network load. Therefore, implementing EIP-7514 before long-term solutions are proposed can mitigate this issue and make future related technical updates smoother. On the other hand, opponents argue that EIP-7514 was hastily introduced without sufficient consideration. They question the urgency of limiting validator growth and the mismatch with the gradual shrinking activation queue. They raise concerns that this proposal may undermine Ethereum’s commitment to network neutrality.

However, the convergence of different viewpoints within the community signifies a commitment to addressing challenges and ensuring Ethereum’s resilience and adaptability in a constantly evolving ecosystem. The community discussions will also encourage the Ethereum development team to conduct more detailed research and development on addressing staking issues without harming other network components.

Conclusion

The discussion surrounding EIP-7514 demonstrates Ethereum’s dynamic governance and how the community actively addresses new issues. EIP-7514 seeks to strike a delicate balance between promoting staking growth, ensuring network efficiency, and maintaining Ethereum’s long-term sustainability, setting a precedent for dealing with unforeseen problems. EIP-7514 will play a crucial role in controlling excessive growth in ETH staking, buying the Ethereum community time to develop viable alternative solutions, and is an important step towards ensuring the long-term stability and prosperity of Ethereum.

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