EIP-7514 proposes to mitigate the rapid increase in ETH staking by changing the growth rate of validators.

Author: Ebunker

Rapid Growth of Ethereum Staking

Despite the opening of staking withdrawal functionality after the Ethereum Shapella upgrade, the total staking amount has not decreased. Currently, the Ethereum network has 898,110 active validators, with a staking amount of 28.8 million ETH, accounting for 24% of the total Ethereum supply, reflecting the widespread adoption and trust in the PoS validation mechanism.

According to Ebunker, Ethereum's annual inflation rate is -0.03%, and the staking annual 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 consistent with the growth in stability and maturity of the Ethereum ecosystem.

Ethereum staking aims to enhance the security and stability of the network, reduce environmental footprint, and position the Ethereum blockchain at the forefront of decentralized applications, enabling secure and transparent transactions in the digital domain. However, the impact of the rapid increase in staking during the development process was unforeseen, and it has posed potential risks to the Ethereum network. Therefore, Ethereum developers are considering EIP-7514, which will change the outlook for Ethereum staking.

Risks of Excessive Ethereum Staking

The significant issue with excessive staking stems from the substantial pressure that the increasing number of validators places on the Ethereum network. As more participants engage in staking, the number of validators and their corresponding responsibilities continues to grow. This leads to increased communication, growth of stakeholders' ledger (beacon chain), surge in traffic, network congestion, and longer transaction processing times.

As the staking amount rises, the pressure on the consensus layer responsible for confirming transactions also grows exponentially. While a high proportion of staking levels can enhance network security, when the staking amount surges in the short term, its benefits to the network are diminished.

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

How Will EIP-7514 Address Ethereum's Staking Issue?

EIP-7514 proposes to mitigate the rapid increase in ETH staking by changing the growth rate of validators. It suggests transitioning the epoch churn limit from the current exponential growth model to a controlled linear growth model.

The epoch churn limit is a setting that restricts the number of validators joining or leaving the Ethereum network during a specific period (epoch). Currently, the number of nodes joining or exiting per epoch is 12, and it increases slowly with the total number of validators.

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

For a simple reason, according to Dankrad Feist, a core Ethereum developer, it is predicted that by May 2024, the staking amount of ETH may reach 50% of the total supply, and it may even approach 100% by December 2024. While high staking levels theoretically enhance network security, achieving high proportions of staking in the short term may disrupt network balance and increase the burden on the consensus layer, while also posing the risk of depleting the available ETH supply on-chain. If EIP-7514 is implemented, it will effectively prevent the rapid increase in Ethereum staking.

EIP-7514 Affects on Ethereum

EIP-7514 cannot immediately address the technical and financial issues caused by the rapid increase in Ethereum staking. The fixed maximum churn limit temporarily alleviates the surge in staking by limiting the number of validators entering or leaving the network during an epoch, buying time for researching long-term solutions. As the churn limit for validators leaving the network remains dynamic, it is not affected by this restriction. This ensures effective reward management and prevents the staking withdrawal queue from becoming too long.

Since the impact of the 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 set on the churn limit for validators leaving the network, it will become more difficult for new validators to join each epoch, thus requiring more time for the staking amount to rise to higher levels. If the validator activation queue remains saturated and this setting does not affect staking demand, the staking amount is still expected to rise to very high levels in the long term.

However, EIP-7514 allows the Ethereum development team sufficient time to explore long-term solutions to the staking issue. Currently, potential long-term alternative directions mainly include appropriately reducing staking rewards, implementing MEV burning, weakening Lido's monopoly position by promoting more liquidity staking providers' participation, and increasing the amount of ETH required per validator. However, since these solutions have not been attempted and blockchain technology is constantly evolving and presenting new challenges, implementing these solutions without a thorough understanding of their implications may lead to unpredictable secondary effects.

Community Reaction and Discussion

EIP-7514 is one of the topics of community discussion during the Ethereum Dencun upgrade period in 2024. Currently, the Ethereum community holds complex attitudes towards EIP-7514.

On one hand, supporters view EIP-7514 as a practical step to control the rapid growth of staking and alleviate network load, so implementing EIP-7514 before long-term solutions are proposed can mitigate the issue, making subsequent technical updates smoother. On the other hand, opponents believe that EIP-7514 was hastily introduced without sufficient consideration, and the urgency of limiting validator growth does not align with the steadily shrinking activation queue. They question whether the proposal may compromise Ethereum's commitment to network neutrality.

Nevertheless, the integration of different viewpoints in the community signifies the community's commitment to addressing challenges and ensuring the resilience and adaptability of Ethereum in the evolving ecosystem. Community discussions will also promote more detailed research and development by the Ethereum development team to solve the staking issue without harming other network components.

Conclusion

Discussions surrounding EIP-7514 demonstrate the dynamic governance of Ethereum 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 the long-term sustainability of Ethereum, setting a precedent for handling unforeseen issues. EIP-7514 will play a crucial role in controlling the excessive growth of ETH staking, buying time for the Ethereum community to develop viable alternative solutions, and is an important step in ensuring the long-term stability and prosperity of Ethereum.

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