Ethereum’s Upcoming Dencun Upgrade Aims to Control ETH Staking Rate
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- Ethereum Core Developers have approved EIP-7514 for the upcoming Dencun upgrade in late 2023.
- EIP-7514 sets a fixed Max Epoch Churn Limit of 8 for the validator activation queue, replacing the previous formula-based calculation.
The Ethereum Core Developers have formally approved EIP-7514 for the forthcoming Dencun upgrade, scheduled for late 2023. This Ethereum Improvement Proposal (EIP) primarily seeks to slow down the rate at which ETH staking increases, thus granting the Ethereum community more time to develop an improved validator reward system.
The primary change introduced by this EIP involves establishing a fixed value of 8 as the Max Epoch Churn Limit, the upper limit for the validator activation queue. Before, the calculation of this churn limit involved dividing “The total number of validators” by 65536, which currently stands at approximately 12 per epoch.
Recap below 😄 https://t.co/mSgoATmlsH
— timbeiko.eth ☀️ (@TimBeiko) September 14, 2023
This decision was made following an Ethereum Core Dev Meeting, as Tim Beiko explained in a tweet,
”Wrapped up another Ethereum #AllCoreDevs: we covered devnet updates, additions to Dencun, and had a full overview of Reth. […] EIP-7514 will be part of the Dencun upgrade! Expect the EIP and associated CL specs PR to be updated to reflect this in the coming days.”
Beiko’s statement emphasized the significance of this change and offered insights into the consensus among Core Developer teams. Dankrad Feist, an Ethereum Foundation Researcher, highlighted the approval’s significance. Feist expressed his support for EIP-7514 and highlighted the rationale behind his endorsement, citing the prevailing uncertainty regarding the ongoing expansion of staking, especially in the liquid form.
Mr. Feist emphasized that there is no guarantee staking, particularly the liquid variety, will maintain its rapid growth indefinitely. To address this concern, he pointed to the potential scenario where the withdrawal queue remains uncleared in the months ahead. The lower churn limit proposed in EIP-7514 is crucial in such a situation.
The Ethereum community anticipates that this limit will offer valuable time for engaging in comprehensive research, conducting constructive discussions, and implementing effective solutions to address the challenges posed by the evolving staking landscape.
Potential Effects on the Price of Ethereum
The ongoing increase in the staking ratio could reduce the amount of liquid ETH accessible for trading. If the staking ratio approaches 100%, it could create a supply shortage, potentially positively influencing the ETH price. However, it’s worth noting that Ethereum developers are not actively endorsing this scenario due to concerns related to technical and security implications.
EIP-7514, therefore, indirectly impacts the ETH price by influencing its supply dynamics, although it is not expected to have immediate, direct effects on the price. Instead, any potential impact on the price will likely materialize gradually over an extended timeframe.
The underlying objective of EIP-7514, as outlined on GitHub, is to “address the adverse consequences of an exceptionally high level of total ETH supply stakING before a suitable solution is in place. If the deposit queue continues to stay consistently filled, experts project that the proportion of staked ETH supply will reach 50% by May 2024, increase to 75% by September 2024, and eventually reach 100% by December 2024.
Significantly, the relatively modest returns currently linked to staking do not necessarily dissuade investors from staking additional capital, especially considering the frequently substantial and unpredictable returns generated by MEV.
Consequently, EIP-7514 functions as an interim solution, providing a grace period for the community to deliberate and devise comprehensive strategies to tackle the emerging challenges.
While the immediate impact of EIP-7514 on the ETH price remains uncertain, its long-term implications, particularly regarding the growth of staking and the management of the supply side, could be substantial. The community and investors will closely observe the outcomes following the implementation of this EIP in the Dencun upgrade.
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