Breaking Down Ethereum’s New Issuance Debate

The Ethereum community has found itself in the middle of a new issuance debate, this time centered on EIP-8363.

This Tapered Issuance Burn concept traces back to at least 2023, when Ethereum Foundation researchers first started publicly worrying about the ETH staking ratio having no ceiling. Bankless Summit even held talks on this in 2024!

PREMIUM: ETH is Money If We Choose It To Be | Ansgar & Caspar on Bankless

Reject the Staking Yield & Embrace the Burn

So why EIP-8363, why now?

If you consider Ethereum’s issuance curve today, there’s no ratio at which the incentive to stake stops. Yield falls as more ETH gets staked, sure, but Ethereum wizzes say this yield would only ever bottom out around 1.5%, no matter how close to 100% of the ETH supply gets locked up.

Right now, Ethereum’s staking ratio is already past 33% of the ETH supply, and with no signs of slowing down. The idea is that if this ratio uptrend continues unabated, it poses two problems:

1. It could push a majority of ETH into the hands of a small number of companies and liquid staking providers, such that the Ethereum community’s fork threat would be weakened in the hypothetical scenario of fighting back against a captured validator set.
2. Past a certain staking threshold issuance serves as a de facto and permanent dilution tax on anyone who isn’t staking, meaning at that point every ETH holder must face the choice of joining in or watching their share of the network shrink.

This is where EIP-8363 would come in. If enacted, the mechanism would keep calculating validator rewards exactly as is done today, then burn a rising slice of them. The burn would grow as total stake grows, until it would fully cancel consensus rewards once staked ETH hits ~50% of the total ETH supply.

If ever that line gets crossed, EIP-8363 would make it so validators earn purely from transaction tips and MEV (i.e. the extra value block producers can earn by including, excluding, or reordering transactions) and not from new issuance until the stake ratio drops below 50% again.

Accordingly, under this paradigm there would still be incentives for validators, though less ETH would get minted along the way. Again, the big idea is that this model is ultimately aimed at reining in the staking ratio and ETH’s dilution specter. Good intentions, yes. Yet more than a few critics have come forward in recent days, panning the proposal as ill-conceived.

The main “against” argument I’ve seen is that EIP-8363 threatens the vitality of DeFi. Staking yield has become ETH’s reference rate, around which onchain lending, liquid staking tokens, and beyond get priced against. Aave founder Stani Kulechov has argued the proposal would make staking yield unpredictable for institutional buyers and could kill the case for borrowing ETH.

“Ethereum should not be punished for its growth,” he wrote.

I’ve also seen skeptics contend that EIP-8363 would destroy the practicality of solo staking. Of course, the crux here is that a home staker’s hardware and electricity bills don’t shrink along with yield, so any downward move in net rewards eats into a smaller margin than it does for, say, a centralized exchange running 1,000s of validators.

Plus, as consensus issuance declines, MEV becomes a larger slice of what’s left for validators to earn from. Critics have pointed out that this dynamic can catalyze a centralizing effect of its own, since MEV capture rewards scale and sophistication more than raw issuance does.

On the flip side, proponents of EIP-8363 maintain it would bolster the moneyness of ETH by protecting non-staked ETH from dilution while also giving it a bona fide supply ceiling, in turn honing ETH’s case as “hard money” even further.

Proponents have also contested that solo stakers would be hit harder than large operators, arguing that since the burn scales with total stake, the point where adding more validators stops paying off arrives earliest for whoever already holds the most.

That point suggests home stakers would still have an incentive to grow all the way to the 50% ratio threshold, while the same wouldn’t be true for large stakers. Under today’s curve, by contrast, the design rewards growth no matter who you are or how much is already staked.

All that said, some of the best discourse I’ve seen on EIP-8363 so far came by way of the EF’s DeFi specialist ivangbi, who threaded a reasonable middle position in a new (personal, not official EF) post out today. He suggested the model could theoretically work and DeFi could weather it, but only “if the fix and the arguments [were] more solid” and not based on “pseudo-economics.” Worth the full read, I say.

From what I can tell, today is EIP-8363’s cutoff for receiving PFI status (i.e. Proposed for Inclusion, Ethereum’s lowest procedural bar, meaning “put this on the agenda for discussion”) for the Hegotá upgrade. That said, nothing has been approved yet, and Hegotá itself isn’t expected to be live on mainnet until next year.

If EIP-8363 does move forward, there will be a long runway either way, as its arrival would kick off an 18-month transition period. However, it’s also possible that the proposal stalls after this week and the staking ratio keeps uptrending. Then we’ll have to see if this same debate resurfaces down the road.

Whatever happens, the grand question is whether Ethereum is overpaying for security right now, and if so, is this fix worth the pain of finding out? Nobody’s settled that yet, so keep this thread on your radar in the months ahead.